In March, Parliament of Luxembourg held the much-awaited debate on the future of the pension system of the private sector (“régime general”) and discussed a long list of possible reforms to guarantee its long-term financing.
Martine Deprez, Minister of Health and Social Security who steered the consultation process, had numerous meetings with professional organizations, unions and youth associations. Citizens had been invited since October 2024 to give their opinion by filling in a questionnaire on a dedicated website (“Schwätz matt”).
A poll by Quest, executed end of last year, revealed that more than half of residents admitted their ignorance of the functioning of the pension system. The complexity of the system hampers a fruitful participation of citizens.
The “Schwätz mat” website posts some useful documentation on the working of the pension system, long-range financing projections by IGSS (General Inspectorate of Social Security) and the minutes of all the bilateral meetings between the Minister and the consulted bodies. This open consultation process is remarkable since the subject had been brushed aside during the last two legislatures, despite alarming reports by the European Commission, the OECD and the IMF pointing to the unsustainability of the national pension system and beyond the welfare state (including long-term care, health and education).
The increase in budgetary expenditures due to social welfare amounts to 10% of GDP in 2070. The highest increase in Europe! Fortunately, the economic and employment growth boom of the last decades, before the Great Recession, fed the pension reserve fund, amounting now to 30% of GDP. The accumulated assets will help offset the deficit of the pension system, which will reach its legal floor in… 2041. An invitation to postpone painful reforms.
Threat to competitiveness?
To bring back the pension system to budgetary equilibrium, the contribution rate, which stayed at 24% since 1985 (employees, employers and the state each paying 8%), should go up to 26% in 2030 (31% in 2040). This means that absent any reform of pension entitlements, companies and employees will face up to a 1% hike in contributions on their paycheck and PNL. This risks denting the attractiveness of Luxembourg. Spiraling social expenditures might deteriorate Moody’s AAA rating, given that Luxembourg is also committed to invest in climate change mitigation, to step up military defense and to maintain competitive tax rates…
“Luxembourg will count almost one million inhabitants in 2070.”
According to STATEC, as long as the country remains attractive for capital and talents, Luxembourg will count almost one million inhabitants in 2070 and thousands of cross border workers. There is a consensus among political leaders and support by public opinion to discard such a buoyant growth scenario.
Hence, governments will have to act resolutely to cut pensions, decelerate adaptation to inflation and wage developments, increasing effective pension age etc. This is highly unpopular. I bet that we will continue to watch procrastination.
This article was published in the 5th edition of Forbes Luxembourg magazine.
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