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Tip-toeing to pension reform

Since the 1970s, some of the biggest brains in Luxembourg have been predicting that the pension system will “hit a wall” in twenty years’ time. Four decades later, and the “time-bomb” is still churning out retirement benefits which are well over 80% of final salaries and with an average retirement age of 57. 2012, and the pension doom-sayers have eventually persuaded the government to act, but not hardly anyone likes their proposals.

80%+ of final salary

It is a curious fact that most people working in Luxembourg have a notion that the pension system is “very generous” but have little idea what this means. Currently, a full pension is earned after 40 years of working and university and someone retiring with a final salary of €3,500 per month (around the national average) receives €3,086. The differential between salary and pension is smaller for those on lower earnings (near 5% for the minimum wage) rising slowly as earnings go up. Most people are getting well over 80% of final salary. Not bad when the house is paid off and the kids have left.

Mild reform

Econometric models have come up with scary figures of how the country’s entire annual output would be needed to fund this bonanza by 2060. Even if the average voter may not necessarily buy these predictions, most can see that we are living through less-good times and this outlandishly generous system is probably on shaky ground. The coalition has been won around (13 years after a previous attempt at reform cost the Socialists their place in government) and a modest reform has been proposed. They have suggested phasing in a pension cut, amounting to 13% over the next forty years for the average wage earner. One could work an extra 3 years to earn the pre-reform figure. Subscriptions would also rise, with employees, employers and the state each contributing 10% of salary to the pension fund, a two-point increase on now.

…is criticised by everyone

Critics remain sceptical that these changes will have a fundamental impact, with the average retirement age still likely to remain around 60. More changes will be needed, they say. Unions and others believe this is the “start of the slippery slope” insisting that change will prove not to have been needed. Despite the minimum pension in Luxembourg (€1,630) being well above the average in Germany (€930) the political argument could be difficult.

December 17, 2012 10:38:33 AM CET

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