7 measures that could change your pension in Luxembourg

The year 2025 is expected to be pivotal for pensions in Luxembourg. For months, the government has been consulting on potential reforms to the pension system.

Will pensions decrease? Will people need to work longer? Will smaller pensions be protected? While no decisions have been finalised, the government's conclusions are anticipated in the spring.

In January, the Idea Foundation examined 28 proposed measures, focusing on their feasibility, the potential savings for the State, and their impact on pension amounts. Below, our colleagues at RTL Infos explored seven measures that could reshape the system.

1 Adjusting the proportional nature of pensions

Luxembourg's pension system comprises a flat-rate component, uniform across all workers, and a proportional component, influenced by career earnings.

The Idea Foundation suggests modifying the proportional component to make it less advantageous. This would likely reduce higher pensions while minimising the impact on lower pensions by increasing the flat-rate portion. The foundation deems this an effective measure for addressing disparities.

2 Extending career 

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One of the most controversial proposals involves extending working life, either by raising the legal retirement age (currently 57, 60, and 65) or increasing the contribution period (currently 40 years).

Idea suggests incentivising longer careers through a simplified premium, providing a 1.5% pension increase for each additional year worked. The premium could be tied to the number of extra years worked or life expectancy at age 60.

Introducing a 'partial pension' for workers aged 57 and above, allowing them to combine part-time work with partial retirement, could ease transitions and reduce late-career unemployment.

However, implementing 'arduous work' criteria remains difficult, especially when it comes to defining eligible jobs and addressing career changes.

3 Increasing contributions

Currently, employees, employers, and the State each contribute 8% of gross income to pensions, amounting to 24% in total.

Raising these contributions could reduce wages and end the end-of-year allowance (see measure 5). According to Idea, this measure might be unpopular as it shifts the burden onto workers while sparing pensioners. Employers, too, are more likely to oppose it due to higher labour costs.

Increasing only state contributions is also an option, although it would eventually require higher taxes. Alternatively, introducing a new 1% contribution, applied to both workers and pensioners, could be seen as fairer, as it would spread the burden more evenly.

Finally, strengthening the 2nd (employer-sponsored pensions) and 3rd pillars (voluntary private savings) via new tax incentives could offset reductions in the primary pension (1st pillar). That said, it would benefit higher earners more than those with low incomes.

4 Revising maximum contribution limits

In 2025, pension contributions will cap at five times the social minimum wage (€13,000 per month). Contributions above this threshold yield no additional pension benefits.

Removing this ceiling could boost State revenues but eventually increase high pensions. Unions therefore propose limiting the rise in high pensions, ensuring contributions from top earners without proportionate pension increases.

Alternatively, employers suggest lowering the cap to four times the minimum wage (€10,500 per month). In exchange, pensions for high earners would be reduced.

5 Ending the end-of-year allowance

Currently, pensioners receive an end-of-year allowance, similar to a 13th month or bonus, capped at €979 as of January 2025. A 2012 law already posits its abolition should contributions increase, but employers are now proposing to permanently remove it.

Although this would be straightforward, it would result in a net loss of over a monthly €80 for all pensioners, regardless of income.

A more socially acceptable option might therefore involve making the allowance degressive, reducing it for higher-income pensioners. Alternatively, merging it with the minimum pension would guarantee its preservation for low-income pensioners while phasing it out for others, either gradually or outright.

6 Changing the regular adjustment of pensions

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Pensions in Luxembourg are currently indexed to inflation, ensuring a 2.5% annual increase, and are further adjusted in line with real wage growth.

Idea suggests maintaining inflation indexing but limiting the adjustments based on wage growth. This change would require 'existing pensioners to share in the effort to preserve the system' while ensuring pensions grow more slowly than wages.

Full adjustments could still be retained for the minimum pension, preventing impoverishment of low-income retirees.

7 Abolishing several additional periods

To ease pressure on the state budget and protect the pension system, some controversial proposals suggest abolishing certain non-contributory periods in pension calculations, such as years of study, child-rearing, or invalidity.

Idea highlights that removing years of study from pension eligibility would be very damaging for future retirees, as these periods often make up a critical part of the career timeline for many workers.