Praise and calls for reform in OECD report about Luxembourg

Luxembourg remains one of the most successful and resilient economies in the OECD, according to the organisation’s latest economic report presented on Monday, 28 April. The biennial review offers a detailed assessment of the Grand Duchy’s current economic performance and the structural reforms needed to ensure long-term sustainability.

The report was unveiled in the presence of Prime Minister Luc Frieden, Economy Minister Lex Delles, OECD Secretary-General Mathias Cormann, Statec director Tom Haas, senior officials, and journalists.

Cormann, an Australian born in Eupen, Belgium, was firm in his praise for Luxembourg’s strengths. He described the country as highly successful, with a high standard of living and a relatively mild economic impact from the Covid-19 pandemic compared to other OECD members. He commended the country’s swift recovery but noted that the 2022 energy price shock had affected growth more severely.

Nonetheless, the OECD expects GDP growth to gradually resume, with inflation now under control. Luxembourg’s traditionally cautious fiscal approach was also highlighted positively, though Cormann warned against complacency.

Pensions: Urgent reform to avoid early collapse

A major focus of the report is Luxembourg’s pension system, which the OECD believes is in urgent need of reform. The system is expected to tip into imbalance as soon as 2026, due to the rising number of retirees and an insufficient working-age population to support them. The pension reserve, which currently holds over €27 billion, could be quickly depleted if no action is taken.

To prevent this, the OECD proposes a set of bold – and potentially unpopular – reforms. First, it recommends raising the overall contribution rate from 8% to 9% for employees, employers, and the state. Second, and more controversially, it calls for gradually increasing the effective retirement age, which is the lowest in the OECD, with workers typically retiring at around 61.

The report echoes earlier findings by the Chamber of Commerce's IDEA Foundation, noting that Luxembourg’s retirees spend an average of 25 years in retirement – among the longest durations in the OECD. The OECD recommends adjusting both early retirement ages (currently 57 and 60) and the legal age of 65, proposing a model that links retirement to life expectancy. Under this approach, workers would retire one and a half years later for every ten years of life expectancy gained, a suggestion that runs contrary to the current government's pledge to preserve the legal retirement age.

The OECD also recommends excluding years of education from the calculation of eligibility for early retirement, a move that would negatively affect highly educated workers, while favouring those with less formal education.

Finally, the OECD proposes adjusting pension benefits themselves by accelerating the gradual changes introduced in the 2012 reform and ending the practice of indexing pensions to real wage growth. Instead, pensions would be adjusted solely in line with inflation. While the OECD describes these changes as "important but manageable", trade unions argue they would weaken the financial stability of pensioners.

Frieden responded by saying that the government has not yet made any decisions on pension reform. However, he downplayed the suggestion of raising contributions, noting that such a move would increase the financial burden on workers, businesses, and the state alike.

Productivity: strong ranking, stagnant growth

Luxembourg ranks third among OECD countries for productivity, but the report warns that growth has stagnated. To reverse this trend, the OECD calls for increased investment in research and innovation, as well as a less restrictive regulatory environment.

Though the report did not specifically analyse Luxembourg’s plans to introduce more flexible working hours, Cormann emphasised that any policy which strengthens productivity, competitiveness, or innovation, and makes it easier to do business, is a welcome step. He added that the benefits of economic growth must also be shared fairly across society.

Climate and housing: a call for more ambition

On climate policy, the OECD notes that Luxembourg is not on track to meet its CO₂ reduction targets for 2030 or 2055. To address this, it recommends greater investment in public transport and adjusting fuel taxes to better align with those in neighbouring countries.

Housing affordability is also flagged as a serious issue. Luxembourg residents spend a larger share of their household budgets on accommodation than almost anywhere else in the OECD. The report urges the government to increase housing supply by accelerating planning approvals and raising taxes on vacant plots to deter land hoarding and speculation.

Report in Luxembourgish: