Government banks on career extension to finance pension reform

Frieden outlined during his State of the Nation speech the main pillars of a pension reform that has already sparked significant tension between trade unions and employers, and is likely to remain a source of controversy. In a joint response, the Independent Luxembourg Trade Union Confederation (OGBL) and the Luxembourg Confederation of Christian Trade Unions (LCGB) stated that the Prime Minister had essentially confirmed all the concerns they had raised in recent months about the future of Luxembourg's pension system.

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Of all the proposals discussed since the debate began, the government has opted for the most anticipated path: lengthening careers. With the pension system expected to fall out of balance by 2026, Frieden confirmed that longer working years will be key to maintaining its sustainability, firmly ruling out higher contribution rates.

The current threshold of 40 years of contributions for a full career will gradually increase. Frieden announced that this period would be extended by three months per year over several years. However, he gave no precise timeline or target, though it now seems unlikely that full pension eligibility will remain below 41 years of contributions.

No start date has been set either, as the details are expected to be presented in a draft bill before the summer. In terms of who will be affected, Frieden indicated that the new rules will apply broadly, with the possible exception of those nearing retirement.

The government will not impose changes on people who are already retired, citing the need to maintain public trust. In this sense, the social contract remains intact: the burden of adjustment will fall on current workers to safeguard pensions for older generations.

As widely expected, the legal retirement age of 65 will not change. Instead, the aim is to bring the actual retirement age, which currently averages around 61, closer to the legal benchmark. Luxembourg workers retire significantly earlier and contribute for fewer years than workers in neighbouring countries such as Germany, Belgium, and France.

Some elements of the system will remain untouched. Notably, supplementary credited years – such as study years and parental leave – will still count toward pension calculations, an important assurance for many workers.

Minimum pension left unchanged

One key demand from trade unions – the revaluation of the minimum pension to combat poverty – was left unaddressed. Instead, Frieden proposed a more targeted social aid mechanism for those at risk of falling into financial hardship in retirement.

These retirees could still be affected by mechanisms introduced in the 2012 reform, which include safeguards such as only partially adjusting pensions in line with wage developments, applied every two years.

Frieden also mentioned the possibility of redirecting part of the country's CO2 tax revenues towards the pension budget. These funds are usually allocated to social measures, and their use for pensions would mark a shift in strategy.

The reform also seeks to make Luxembourg's third pension pillar – private retirement savings – more appealing. While the first pillar is the mandatory state pension and the second consists of optional employer pension schemes, the third pillar involves personal retirement savings plans with tax benefits.

"For those who have the means to save, we will make third-pillar private pensions more attractive", Frieden announced.

The PM further said the government plans to enhance incentives for those who are financially able to save, encouraging them to build a private buffer for the future. Currently, individuals can deduct up to €3,200 annually (€6,400 for couples) from their taxable income if they contribute to a private pension plan.

Finally, Luxembourg's pension reserve, worth €27 billion and equivalent to more than four years of spending, will remain intact. The government intends to preserve this financial buffer to ensure it continues generating returns on the markets.

Drawing from it, Frieden suggested, would risk undermining future revenues, something the government is keen to avoid.