Management and employee representatives exchange views on pension system

In recent times, both sides of industry have been debating the future of the pension system. The Chamber of Employees believes that the system is viable in the short term. Admittedly, long-term avenues of funding need to be identified. The Union of Luxembourg Enterprises, on the other hand, insists that reform is needed in the short term. Any postponement of reform would make corrective measures even tougher for future generations of beneficiaries and pension holders.

UEL calls for pension reform

Based on a baseline scenario using official data from the General Inspectorate for Social Security (Inspection générale de la sécurité sociale, IGSS) and incorporating the effects of the economic and financial crisis, the Union of Luxembourg Enterprises (Union des Entreprises Luxembourgeoises, UEL) notes that maintaining current pension arrangements would lead to debt equivalent to 190% of gross domestic product (GDP) by 2050. According to UEL, the absence of any reforms with regard to social benefits would create a vicious circle. Social security contributions would have to increase significantly. This would result in a major loss of economic activity, which would in turn adversely impact receipts into the general pension system. Consequently, this further deterioration of the system would entail an additional rise in contributions.

Measures proposed

Anxious to remain competitive and protect the social nature of the system, businesses in the Grand Duchy of Luxembourg are therefore proposing various measures, some of which will supposedly lead to noticeable medium-term and long-term effects. The main proposals are as follows:

• reducing the replacement rate – that is, the ratio between final salary and the first monthly pension payment;

• withdrawing the automatic adjustment of pensions in line with general salary trends referred to as automatic indexing;

• introducing a multiplying coefficient initially set at 1 and reducing it by 0.7% each year to compensate for increasing life expectancy.

In addition to these proposals, UEL is in favour of increasing the number of years during which contributions are due. Rather than raising the official retirement age of 65 years, the employers advocate increasing the actual retirement age (currently around 58 years of age) by incentivising employees to continue working through a reform the way pensions are calculated.

Viability of pension system

The Luxembourg Chamber of Employees (Chambre des Salariés, CSL) has recently set out its own analysis of the situation. According to CSL, the pension system is viable for the next five years, with the pension reserve fund expected to amount to €10.8 billion by the end of the period. For the medium term, worker representatives are proposing their own avenues of funding, which include removing the ceiling on social security contributions. Under the current system, employees who earn more than five times the statutory minimum wage do not pay any additional contributions. According to CSL, removing the ceiling on contributions would raise 1% of the 5% of GDP required to finance pension funds in the future. Other avenues suggested by CSL include either a rise in company contributions which, according to calculations, would have to increase from 24% to 32%, split equally between workers, employers and the state, or some other distribution based on each company’s ‘added value’ or productivity gains.

Minister calls for consultation before making any decisions

According to calculations by internal working groups, maintaining current pension levels would require an active population of between 1 million and 1.5 million people to be paying social security contributions over the next 30 years. In light of the 216,800 people currently paying contributions, this is a completely unrealistic assumption, according to the Minister of Social Security, Mars Di Bartolomeo. Consequently, the minister insists that reforms are necessary. However, he argues that taking drastic measures is not what is needed and there is no point acting in haste by implementing emergency measures like raising the retirement age from 65 to 67 years. Furthermore, while the minister is leaning towards increasing the number of years during which contributions are actually payable to 40 years, he firstly wants to discuss the matter not only with the government and the various political parties, but also with civil society, so as to reach a consensus that is acceptable to all. A draft bill on pension insurance is likely to be put forward by December 2010.

Odette Wlodarski, Prevent