ILO submits study on pensions scheme

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An International Labour Office study on the actuarial and financial situation of the Luxembourg pensions insurance scheme, submitted to the Ministry of Social Security in February 2001, describes a healthy financial situation. However, it recommends that the government should raise the current contribution rate and lower the expenditure of the basic state pension scheme, and at the same time consider raising the early retirement age.

Since 1998, when seven trade unions agreed a joint platform to demand structural improvements to the general pensions insurance scheme (LU9811175F), pensions reform has become an increasingly burning issue in Luxembourg (LU9812183N).

A study commissioned by the government from the International Labour Office (ILO) on the actuarial and financial situation of Luxembourg's general pensions scheme was presented to the Ministry of Social Security on 15 February 2001.

The report finds that the general scheme's financial situation is currently healthy. However, the report gives a long-term (between now and 2050) projection, based on two scenarios that take account of the demographic and economic situation in the country's labour market. The first scenario (a) envisages a strong long-term increase in employment (with GDP increasing by 4% per year and employment by 1.8%), while the second (b) is based on limited labour supply (annual GDP growth of 2% and no growth in the labour force).

The report states clearly that although any pension scheme is very sensitive to changes in the economic environment, the Luxembourg system is particularly vulnerable given the national economy's reliance on cross-border workers resident in neighbouring countries. The study highlights a concealed "demographic debt" that derives mainly from the rising number of cross-border workers entering the national economy and, since 1980, entering the general pension insurance scheme as new contributors. It is forecast that cross-border workers will begin to draw their pensions in about 20 years; this debt will therefore have to be paid from 2025 onwards.

On the basis of scenario (a) the general pensions scheme will have a positive annual balance and a positive reserve situation until 2050. Although reserves will begin to decline from 2026 onwards, reserves so far accumulated will make up annual differences between contribution receipts and total expenditure. Scenario (b) envisages a stabilisation of the number of cross-border workers after 2004, and concludes that it will no longer be possible for pensions expenditure to be paid solely out of contributions from 2013.

The largest single group of Luxembourg residents contributing to the pensions scheme are aged 30-40; this means that the number of new pensioners living in Luxembourg will continue to increase over the next 20-25 years.

The experts recommend that the Luxembourg government should increase the current pensions contribution rate and reduce the general pension insurance scheme's level of expenditure, and at the same time consider raising the early retirement age. The ILO study also advocates a stricter policy on the criteria for drawing disability pensions after the age of 50. Given that 10% of active people in Luxembourg aged 56 are in receipt of a disability pension, the disability rate will have to be reduced by half, says the study.

Lastly, the ILO experts advise the government against raising the level of pensions and paying beneficiaries a "13th-month" pension each year; the latter idea is a claim of the largest opposition party, the Luxembourg Socialist Party (Lëtzebuergesch Sozialistesch Arbechterpartei, LSAP).

The Prime Minister has announced that a "round table on the issue of private sector pensions", which will bring together all actors in the Luxembourg economy, would meet in early March 2001.

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