Government launches pension proposal

Luxembourg Finance Minister Luc Frieden and the Minister of Social Security, Mars Di Bartolomeo, presented a plan for the reform of the state pension system on 17 March 2011. The government wants to maintain the current value of pensions by extending the period over which employees contribute. The reform, nicknamed ‘pensions à la carte’, because individuals can choose when to retire, has been criticised by employers and trade unions, although for very different reasons.

Background

Finance minister Luc Frieden said:

We estimate that the number of people over 65 years will pass from 15% to 25% [of the country’s population] over the next 50 years and that life expectancy will increase on average by up to seven to eight years.

The negative impact of the Luxembourg reforms will be less harsh than the ones in France, because both ministers say they do not want to make changes to the:

  • rights of current pensioners;
  • lawful pensionable age of 65 years;
  • distribution of the retirement scheme;
  • tripartite financing of the system;
  • conditions individuals must meet to retire.

The principal measure which will allow the retirement scheme to be funded for up to the next 50 years, according to the government, is the introduction of an incentive for individuals to work longer. Social Security Minister Mars Di Bartolomeo said:

Employees will have the choice between retiring as soon as they have the right to do so (in theory after 40 years of paying contributions) and thus accepting a reduction in their pension or, alternatively, they can choose to continue to work and thus compensate for this loss on the level of their pension. A person who works throughout their entire professional career, under the new pension system, and who ceases to work after contributing for 40 years, will face a reduction in their pension of 15% compared with the current system.

Working for an extra three years would make it possible for them to get the same money from the new system, as they would have from the current one. The government intends to discuss the reform with the social partners, and hopes to adopt a preliminary draft law before the Parliament’s summer recess.

Reaction to pension reforms

The first reaction of the Luxembourg Confederation of Independent Trade Unions (OGB-L), the Luxembourg Christian Trade Union Confederation (LCGB) and the General Confederation of the Public Sector (CGFP) was to adopt a common declaration, on 14 April 2011, which denounced the key points of the reform and the fact that it will reduce the level of the future pension. The biggest banking union Aleba, declared on 1 May that it was opposed to the reform and asked the government to withdraw it.

OGB-L and LCGB regret the initial absence of social dialogue. OGB-L said it assumed ‘that the information given by the two ministries were only the first lines of thinking which will leave broad room for manoeuvre’. LCGB was more critical, saying:

It is extremely alarming that a reform, which will have both an impact on pensioners and employees, is not discussed with the social partners before an official presentation… [it is] unacceptable that current employees see the new rules imposed on them […] during their working life.

LCGB also demanded that ‘the mechanisms of anticipated retirement which currently exist are maintained and improved.’

OGB-L is also sceptical about the idea of ‘pension à la carte’, suggesting that nowadays employees often find it more difficult to find work when they get older and that ‘it is completely illusory to speak today about a contribution period of more than 40 years in order to benefit from the current level of pensions’. On 7 April, OGB-L put out a press release (in French, 126Kb PDF) giving its verdict in full.

OGB-L has criticised the need for the reform, arguing that Luxembourg’s state pension scheme is ‘extraordinarily healthy’. Robert Kieffer, President of the National Pensions Insurance Bank, told newspaper Le Jeudi in an article (in French) (17 March) that: ’The reserve of the pension regime has increased to €10.5 billion, which is equivalent to 3.7 times the current annual expenditure.’ However, Yves Mersch, President of the Central Bank of Luxembourg, claims that this situation cannot persist. He said: ‘The system requires growth in employment of 3.4 % per year to sustain itself, which obviously appears to be impossible.’ Yves Mersch welcomed the government’s plan. He added:

Even if the fund’s reserves are comfortable, the governor [of the bank] has judged that Luxembourg will be the country which will see its expenditure on pensions increase even more by 2060. Without this type of reform the country’s GDP would drop by 15 points.

However, Mr Mersch feels that the government is being too optimistic. He says the reform is based on the idea that there will be an increase in GDP of 3% and an increase in employment of 5%. He said an economist would have produced more realistic data, and added: ‘This scenario retains the hypothesis that Luxembourg will continue to grow at a quicker rate than Europe generally.’

Some daily newspapers have been critical of the proposed changes. For example, according to an article (in German) in Tageblatt (18 March), Mars Di Bartolomeo’s comment that those who work more will have a better retirement and those who do not will receive less ‘is completely false’. The newspaper says that those who work as much in the future as today will receive less, and those who work longer will receive ‘actually only the same amount’ as those, who today, work for a total of 40 years. The daily newspaper also suggested that Luc Frieden was confused over the impact of this change, and by focusing purely on the public finances had neglected to understand the proposal’s social impact and the way it would affect citizens’ incomes.

On the employer side, only the Craftworkers’ Federation welcomed the ‘pension à la carte’ while suggesting that other measures could be used in order to ensure the system’s sustainability, without meddling too much with the economic attractiveness of the country. The Union of Luxembourg Companies (UEL) is waiting to obtain the details of the project before making a decision, but it has speculated that the reform does not go as far as its own proposals (in French, 185Kb PDF) published in 2009.

Commentary

According to the government, demographic change is at the heart of the proposed changes to the state pension scheme. The reforms introduce the notion of a flexible retirement policy to allow workers to retire at the current default retirement age with a reduced pension or to work longer in order to receive the maximum benefits. The proposed reform, as in other European countries, will take an important place in the social dialogue agenda in Luxembourg for the coming months.

Frederic Turlan, HERA

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