In a recent interview with RTL Radio, Martine Deprez, the new Minister of Health and Social Security in Luxembourg, underscored the pressing need for action regarding the country's pension system financing.

Minister Deprez expressed concern over the sustainability of the pension fund reserves, stressing that by 2042, they will be completely depleted. She firmly stated, "It is irresponsible to do nothing," acknowledging the complexity of the issue while emphasising the imperative of finding viable solutions.

Despite the lack of a concrete plan, Deprez assured that her ministry is actively engaged in discussions on the matter. She advocates for an inclusive approach, intending to gather input from various social partners before convening a larger group for comprehensive deliberations.

How does the Luxembourg pension system work?

In Luxembourg, pension protection is broadly categorised into three pillars. For the private sector, the main pillar consists of contributions to the pension fund, which currently amount to 24% of gross salary. The "régime général" specifically involves contributions capped at five times the minimum wage, with employers, employees, and the state each contributing 8%. The second pillar pertains to supplementary pensions offered by employers, and the third involves private supplementary insurance. In the case of the public sector, all three pillars are covered by the employer.

Minister Deprez revealed that the current cost of the 210,000 pensions being disbursed is €5.7 billion, while annual contributions amount to €6.7 billion, resulting in a surplus of approximately €1 billion. However, she cautioned that this surplus could vanish rapidly, leading to a potential deficit of €1 billion in the near future. In fact, current estimates suggest that in four years' time, the pension fund's income will no longer be sufficient to cover expenditure.

The minister highlighted the urgency of addressing the impending shortfall, citing the 2012 pension reform as the last substantial action taken. She criticised the lack of ongoing discussions on pension matters, emphasising the need for renewed attention and proactive measures to ensure the long-term stability of Luxembourg's pension system.

The government's approach to pension reform

The current pension structure comprises two primary components: a fixed portion (24% of a specified amount) uniform for all recipients and a variable component linked to individual earnings. This means that the higher someone's salary, the higher the pension they will receive following retirement. Minister Deprez stressed that the government aims to build on the foundation laid by the 2012 pension reform. The proposed adjustment involves a gradual increase of the fixed portion from 24% to 28%. In return, the variable portion tied to salary will see a slight reduction. The overarching goal is to boost the overall pension amount received by everyone.

Responding to opposition accusations of social cuts, Minister Deprez asserted that such claims overlook the intricacies of the issue. She highlighted that the coalition programme emphasises the continued significance of compulsory insurance as the main pillar, with the government actively seeking to strengthen the first pillar rather than diminish it. The minister suggested that, depending on future developments, consideration may be given to the potential increase in importance of the second and third pillars.

Increasing contributions: A 'double-edged sword'?

Addressing the question of why there are no plans to increase contributions, Minister Deprez explained the potential pitfalls of such a strategy, characterising it as a "double-edged sword." Increasing contributions would predominantly affect the working population, who are the current contributors. Forecasts indicate that by 2027, the Pension Fund will begin spending more than it generates, depleting reserves rapidly. The entire reserve could be exhausted within 15 years, by 2042. Minister Deprez stressed the urgency of action, noting that the 2012 reform is slated for 2052, and prompt measures are essential to avoid waiting until a critical point.

The minister has not yet been able to say when a detailed plan will be unveiled, indicating that this hinges on the progress achieved in discussions with key stakeholders. Whatever the outcome, Deprez stressed that implementation of the new system could not wait until 2052 but should ideally take effect by 2030 or 2035.