What is the pension adjustment cap?

To understand the issue, it is first necessary to explain what the pension "readjustment" is. It is not to be confused with "revalorisation", which comes into play when someone first enters retirement. The readjustment is an annual adjustment of pensions in line with the average wage evolution across the country.

This is in addition to the index mechanism, which adjusts both salaries and pensions according to inflation.

Last year, pensions were increased by 1.1% under this measure, and on 1 January this year, the rise reached 1.6%. For a minimum pension of €2,350, that meant around €38 extra per month. Someone with a €4,000 pension received an additional €64, while a pension of €8,000 rose by €128 gross.

With the pension fund having paid out almost €7 billion in benefits last year, the readjustment alone will have added at least €110 million in expenditure this year.

The "moderator" or "cap" acts as a brake on such spending. It was introduced as part of the 2012 reform under the Christian Social People's Party (CSV) and the Luxembourg Socialist Workers' Party (LSAP) government coalition, and comes into effect only if pension expenditure exceeds revenue. Or, in technical terms, when the "prime de répartition pure" – pure pay-as-you-go rate – rises above 24%.

Put more simply, as Minister of Health and Social Security Martine Deprez explained last Thursday, it applies when the pension fund records a deficit. She gave a concrete example: if a deficit were to occur in 2030, it would only be formally identified in 2031.

The government would then, in 2032, present a bill proposing that pensions should no longer rise in full the following January, she explained. Instead of a full 1% increase, the adjustment could be limited to 0.25% or 0.5%, or even frozen entirely, she said.

According to Deprez, 2030 is now the new target year when such a shortfall might emerge. Earlier projections suggested this could happen as soon as next year, but higher contribution rates agreed on during the third social roundtable negotiations have pushed that horizon back.

Political background

The pension readjustment cap has always been politically contentious. In the 2012 reform debate, the Democratic Party (DP) argued it should be scrapped altogether, while the Alternative Democratic Reform Party (ADR) agreed, except in the case of small pensions.

Serge Wilmes of the CSV, speaking on behalf of the party's youth wing at the time, felt the reform did not go far enough and said the readjustment cap should apply automatically in the event of a deficit. He nonetheless voted in favour as part of the governing majority.

Robert Weber was the only CSV MP to vote against, echoing union concerns that the measure weakened pension rights, while LSAP MP Roland Schreiner abstained for similar reasons.

Back in 2012, LSAP Minister of Health and Social Security Mars Di Bartolomeo was criticised by the left for introducing the cap and potentially lowering pensions, but at the same time faced criticism from the DP and others who argued his reform did not go far enough.

In hindsight, the compromise worked for around a decade. The same reproach is now directed at PM Luc Frieden, who has been told by opposition parties that the government's latest proposals merely postpone the financial crunch by three to five years.

Initially, Frieden wanted to extend working lives rather than raise contributions, but unions and protesters attacked this approach as unfairly targeting employees.

It is worth noting that in 2012 projections suggested pension expenditure would outstrip revenue by 2020 – five years earlier than current projections. This, unions argue, shows that forecasts are often overly pessimistic.

Nonetheless, with an ageing population and rising wages leading to higher adjustments, a deficit is bound to materialise sooner or later. The burden will then fall on the next generation.

Politically sensitive mechanism

A small historical footnote illustrates the sensitivity of the system. Shortly after the 2012 reform, average wage growth in Luxembourg turned negative, which is a rare occurrence.

In theory, pensions should then have been cut. However, MPs decided to ignore this, as forecasts already indicated wages would grow again the following year.

According to the official records of parliamentary debates, the decision was made to avoid pensions bouncing up and down within the space of two years, and not, as some might assume, because of electoral considerations.