So far, everything has gone well. But anything may go wrong tomorrow. And, contrary to popular belief, the tipping point is closer than it appears.
The contributions of workers, businesses, and the government are currently sufficient to fund retiree pensions. The universal pension insurance scheme, which pays 194,441 pensions, received 461,345 contributions in 2020.
Between 2013 and 2020, spending (+47%) grew at a greater rate than income (44%). “However, the general plan remains in surplus, and the accumulated reserve also generates investment income, which contributes to the expansion of the same reserve, and thus to its medium-term financial balance.”
But will the system be as healthy tomorrow? While the Pension Fund is currently “in a sound financial position,” it will need to adapt to meet the needs of an ageing population and changing economic conditions.
The General Inspectorate of Social Security (IGSS) states in its latest report on the Pension Fund (which finances pensions, invalidity, and survivors’ pensions) that the pension system will eventually have to change, or it would collapse. The Idea Foundation (and others before it) already made this observation in 2019.
In short, the Luxembourg labour market and GDP growth will not be sufficient to fund pensions in the long run.
“The creation of new jobs will not keep up with the number of pensioners,” the IGSS and the Ministry of Social Security confirm.
As if travelling on a quiet motorway, the system still has plenty in the tank and is going at a good pace. But in the distance, the road becomes very winding. So much so that you have to change gear to avoid a disastrous spin.
At the end of 2020, the scheme had a reserve of €23.8 billion. That is a nice advance of 4.8 years of expenditure. Between the end of 2012 and the end of 2020, this reserve swelled by 88%. So much for the “sound financial position”.
However, if nothing is done, expenditures may soon outweigh revenue. Luxembourg would be forced to use its reserves to pay pensions. All of the projections confirm this, but some differ by a few years.
Three “critical events” will occur, according to the report’s baseline scenario:
The State Council opted to hold the course at this stage, keeping “the overall contribution rate of the general pension insurance scheme at 24% for the coverage period 2023-2032.” It also asked the Economic and Social Committee to “propose alternative future avenues to assure the scheme’s financial viability.”
“Our general pension insurance scheme is financially sound and will remain so for the foreseeable future. However, the demographic trend is similar to that in many other countries, and job growth will not be able to compensate for it forever, " Minister of Social Security Claude Haagen acknowledged.
Will Luxembourgers and cross-border workers be required to work until they reach the advanced age of 72, as the European Commission recommends? Or will they be required to make further contributions? Or perhaps both? Will there be a cap on the number of pensions available? Whatever solutions are applied, Luxembourg’s Pension Fund depends on it.
