Luxembourg urged to tackle housing and pension challenges

At the conclusion of its annual mission to Luxembourg, the International Monetary Fund (IMF) noted that while the Grand Duchy's economy is experiencing faster growth, several risks to sustained expansion in 2025 remain – with housing affordability being a key concern.

Housing

Although the IMF acknowledged a recent price correction, primarily affecting existing homes, it emphasised the need for government action to make housing more accessible.

Anna Shabunina, speaking on behalf of the IMF, stated, "We believe it is crucial for Luxembourg to address the issue of affordable housing."

She explained that rising housing costs exacerbate the cost of living, increase wage pressures, and, if unresolved, could hinder future economic growth.

The IMF's assessment of the government's efforts to tackle the construction and housing crisis was mixed. While it praised measures to streamline construction procedures and supported property tax reforms aimed at mobilising building land and increasing the supply of new homes, it cautioned against policies that stimulate demand. According to Shabunina, such measures could delay necessary market adjustments.

Specifically, the IMF highlighted that tax incentives for homebuyers – particularly investors renting out properties – are keeping prices for new homes artificially high. Although these incentives may have softened recent economic shocks, they have also created a "moral hazard" rather than fostering sustainable market momentum.

The IMF also raised concerns about the broader impact of high housing costs. Rising property prices have led to larger loans, leaving an increasing number of borrowers struggling to meet repayments. This trend is reflected in the growing share of non-performing loans at Luxembourg's banks, which rose from 2.6% to 3.4% in 2024.

Pension system

The IMF also addressed Luxembourg's pension system, highlighting that the effective retirement age in the Grand Duchy is relatively low compared to international standards. To address this, the IMF recommended raising the effective retirement age by phasing out incentives for early retirement and aligning the retirement age with increasing life expectancy.

The IMF described Luxembourg's pensions as "generous," noting their high replacement rate relative to individuals' income during their working years. However, the IMF did not oppose increasing revenues to ensure the system's financial sustainability. While acknowledging that higher social contributions could be "part of the solution," the IMF cautioned that careful analysis is needed to assess potential negative impacts, particularly on labour market participation.

Turning to state finances, the IMF welcomed Luxembourg's plans to introduce a debt brake, a measure it believes will help the country maintain its AAA credit rating. The IMF advised saving unexpected revenues and unspent budgetary allocations to strengthen fiscal resilience. Additionally, it recommended phasing out crisis-related aid measures introduced in recent years.