Idea Foundation proposes four scenarios to save Luxembourg's pension system

The Idea Foundation unveiled four pension reform proposals on Thursday, 3 April, amid ongoing national debate about the system's sustainability. These scenarios arrive as Luxembourg faces mounting pressure to address projected deficits in its pension system.

Idea economists presented stark warnings contrasting with union positions that downplay reform urgency. "The longer we delay, the more drastic future measures will need to be," said study author Muriel Bouchet, noting required adjustments could become "two to three times more severe" if implementation waits 20 years. The analysis echoes Minister of Social Security Martine Deprez's March parliamentary declaration that "doing nothing is not an option."

Recent General Inspectorate of Social Security (IGSS) forecasts compound these concerns, predicting system deficits beginning in 2026. Demographic shifts threaten to accelerate financial pressures, with Luxembourg's aging population growing rapidly while its worker base - currently financing pensions - fails to keep pace.

Idea director Vincent Hein emphasised Luxembourg's limited options: "Only sustained workforce growth through immigration could offset aging trends," he noted during the presentation. However, the foundation cautioned against over-reliance on economic expansion or labour market solutions as long-term fixes.

Four pathways to pension sustainability for Luxembourg

Economists Muriel Bouchet and Jean-Baptiste Nivet have developed four distinct reform scenarios aimed at preserving Luxembourg's private sector pension system and in particular the "first pillar," i.e., state-guaranteed pensions. These proposals seek to stimulate government discussion while ensuring long-term financial stability and generational equity.

The framework presents options ranging from austerity measures to automated adjustments:

• A "Squirrel" reform: prioritises state savings through stricter contribution requirements
• A "Social" reform: emphasises worker protections and benefit preservation
• An "Age" reform: gradually extends career durations to match life expectancy gains
• An "Autopilot" reform: implements mechanical spending-revenue balancing

While the automatic mechanism offers straightforward deficit correction, the first three approaches incorporate nuanced social and economic considerations. All scenarios share core objectives: maintaining system equilibrium and preserving Luxembourg's substantial pension reserves (projected at 2-4 years of coverage).

Luc Frieden, Martine Deprez and Serge Wilmes during the consultation debate on pension reform on 19 March 2025. / © Chamber of Deputies / Flickr

Bouchet emphasised the proposals' deliberate design: "Our proposals are admittedly a little technical, but they haven't come out of a magic hat." The models specifically guard against overburdening current workers while addressing the IGSS's 2026 deficit projections.

Each scenario remains open to adaptation, with Bouchet noting they're intended to "inform rather than dictate" policy decisions. The presentation particularly highlighted the need to balance fiscal responsibility with Luxembourg's tradition of social protection.

1. The "Squirrel" reform: How to maximise savings

© Envato

The "Squirrel" scenario proposes Luxembourg's most fiscally conservative pension reform path, prioritising systemic balance through measured austerity measures. This approach combines revenue increases with targeted spending reductions while maintaining protections for lower-income retirees.

Central to the plan is a restructuring of benefit allocations, beginning with potential reductions or complete elimination of the €980 annual end-of-year allowance for higher-income pensioners starting in 2027. The reform would also adjust the automatic linkage between pension values and real wage growth, maintaining basic wage indexation but reducing additional wage-mirrored increases.

These changes would operate alongside a fundamental structural overhaul - the "50+1" plan - designed to gradually rebalance pension calculations through 2052 by increasing flat-rate components while proportionally decreasing earnings-based portions.

Funding mechanisms would see strategic modifications, including increased contributions specifically for long-term care insurance, which the economists favour over blanket contribution hikes due to their broader base.

The proposal additionally calls for the state to assume administrative costs currently borne by the National Pension Insurance Fund (CNAP). A built-in conditional monitoring system would provide regular economic sustainability assessments to ensure ongoing system health.

The reform's progressive architecture delivers tiered impacts across pension levels. Those receiving modest pensions (around €2,500 monthly) would see relative protection, with projections indicating over 15% growth by 2052. Mid-range pensions (approximately €4,000 monthly) would experience slower value growth, while the system's highest earners (€9,000 monthly) would absorb the greatest purchasing power reduction. This graduated approach, as Bouchet emphasised, "maintains equilibrium while asking more from those best positioned to contribute," preserving Luxembourg's pension reserves while addressing imminent deficit projections.

2. The "Social" reform: A progressive approach to pension equity

© CDC / Unsplash

Positioned as a direct counterpoint to the austerity-driven "Squirrel" model, the "Social" reform proposal prioritises pension improvements and equity while maintaining systemic stability. Bouchet explained: "With this one, it's crystal clear, we're reversing the logic of the previous one."

The plan safeguards critical benefits for vulnerable retirees, notably preserving the end-of-year allowance for those receiving minimum pensions. It simultaneously boosts the full-career minimum pension (around €2,300 in 2025) by 10%, a measure explicitly designed to combat old age poverty and reduce Luxembourg's gender pension gap (the majority of those receiving the minimum pension are women).

Revenue reforms adopt a progressive model by abolishing the current €13,000 contribution ceiling, requiring employees, employers, and the state to contribute up to 3% on all salary segments – including very high earnings – while preserving corresponding retirement rights.

The redistributive effects would curb growth at the highest pension levels (notably those around €9,000/month) while significantly strengthening purchasing power for lower-income retirees.

3. The "Age" reform: Making people work longer

Extending the careers of Luxembourg workers? This is one of the ideas put forward by the Idea Foundation. / © Shutterstock

Luxembourg's pension system currently supports retirees for a European-leading average of 25 years. The "Age" reform proposal addresses this longevity by gradually aligning career lengths with increasing life expectancy, while maintaining system sustainability. Unlike simple retirement age increases, the plan emphasises supported transitions, as Bouchet stressed.

The framework proposes incremental adjustments to Luxembourg's three retirement tiers (currently 57, 60, and 65 years), along with corresponding career length requirements. By 2050, this would translate to approximately two additional working years for future retirees. While extended careers would yield higher pension amounts through additional contributions, a carefully calibrated "longevity coefficient" would moderate payouts to ensure fiscal balance.

The plan further encourages workforce participation through voluntary retirement delay bonuses and flexible transition options including partial retirement schemes and progressive reduction of working hours. Special provisions would improve management of late-career challenges, particularly for physically demanding occupations.

Near-term projections show pensioners maintaining financial advantages through the 2050s under this model. However, the proposal faces political complications as it contradicts current government commitments to preserve the legal retirement age of 65.

4. The "Autopilot" reform: A self-regulating pension model

The most technically straightforward proposal, the "Autopilot" reform, establishes an automatic balancing mechanism for Luxembourg's pension system.

This mathematical approach would dynamically adjust contributions and benefits based solely on financial equilibrium requirements, activating only when deficits emerge and remaining dormant during stable periods.

While guaranteeing systemic solvency, this approach carries significant implications. Projections indicate possible pension reductions reaching up to 20% by 2050 compared to current policy trajectories. The government and social partners would therefore likely have to intervene and implement mitigating measures to cushion these adjustments.

"We are proposing evolution, not revolution. The reforms are designed to make people think, and it will be the government's job to combine them in the best possible way," Bouchet concluded. The government has formally received Idea Foundation's proposals ahead of continued consultations through 24 April. "By mid-May, we will know everyone's position," Minister Deprez announced at Thursday's roundtable discussion.