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Table 7. Performance indicators: sustainable retirement income

Table 7. Performance indicators: sustainable retirement income

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Fiscal policy



49



pension system and disability benefits have allowed the average age at which

pensions are drawn to drop to one of the lowest in the OECD area, at only 57 years.

Disability pensions are proportionately more important for women than men and

enable them to withdraw from the labour market at the same age as men, even

though they draw retirement pensions two years later than men. Expenditure on

disability benefits amounted to 1.8 per cent of GDP in 2001 and the number of

beneficiaries was equivalent to 7.2 per cent of the employed population in the

same year.32 Public pension expenditure accounted for 9 per cent of GDP in 2001,

and is projected to rise to over 12 per cent by the middle of the century, on the

assumption of 3 per cent economic growth (Bouchet, 2003).33 By 2020, with

unchanged contribution rates of 24 per cent of earnings, the financial position of the

system would start to deteriorate. The principal landmarks would be a decline in

the surplus of contributions over expenditure as from 2020, an overall deficit in 2041

and the elimination of all assets in 2055. It should be borne in mind that these

results are conditional on a large set of hypotheses and could be considered

optimistic as they imply that the labour force would increase by 67 per cent

between 2001 and 2050 (i.e. an annual average growth rate of 1.3 per cent). Were

labour force growth (holding growth in cross-border employment constant) to be

lower, a net liability position would emerge earlier.

The financial health of the system for the next two decades is, moreover,

subject to the substantial risk that the continued inflow of foreign workers might

not persist.34 The contributions of cross border workers were almost double the

pension benefits paid to them and the difference represented nearly the entire

surplus of the system in 2000.35 Given their lower average age, that the phenomena is relatively recent and still continuing at a rapid pace, it will take several

decades before the expenditure consequences of these flows become evident. In

addition, continued immigration on the scale of the recent past would boost the

resident population to 60 per cent above its 2000 level by 2050 in the baseline

scenario. These two movements are acting as a powerful offset to the ageing of the

domestic population in that period. A slow down in either the inflow of crossborder workers or net immigration would bring forward stresses in the system that,

under current trends, would not otherwise become evident until the second half

of the century. For example, a 50 per cent fall in cross-border worker flows

from 2006 onwards would bring a fall in the surplus of the pension system of

2½ per cent of GDP by 2035.

Policy

In contrast to reform efforts in many other OECD member countries,

recent changes to the Luxembourg pension system have increased its generosity.

In 2002, following the release of a commissioned actuarial review of the pension

system (ILO, 2001), the government introduced the “Rentendësch reforms” (OECD,



© OECD 2003



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OECD Economic Surveys: Luxembourg



2001). The spending increases included across-the-board increases in pension

benefits, higher revaluation factors for past earnings, higher payments to widows

and orphans and the introduction of an end-of-year supplement to pensions.36 In

addition, fiscal incentives were given for voluntary private pension saving. These

reforms are estimated to increase spending by almost 10 per cent (0.6 per cent of

GDP), resulting in deficits from the middle of the century (as noted above). The

assets of the pension system may be reduced from 40 per cent of GDP in 2002 to

14 per cent of GDP in 2050 (Bouchet, 2003).

The contribution rate of the pension system is reviewed periodically but

with a mechanism that leads to delayed adjustment to shocks. Every seven years,

projections are made of expenditures and revenues for the following seven years.

The contribution rate is then adjusted to ensure that the assets of the system are

no lower than 1.5 times the annual expenditure of the system at the end of the

seven-year period. Using this rule, the contribution rate will rise from 24 per cent

currently to 30 per cent of GDP by 2050 with growth of 3 per cent (Bouchet, 2003,

p. 40).37 Such a rule, though, is insufficiently forward looking. The increase in the

contribution rate would come only a few years before assets started to decline

and would require steady increases in the contribution rate beyond that date. A

more sustainable adjustment rule would be to set contribution rates at a level that

ensured a stable level of assets at the end of a 75-year projection period. On that

basis, and assuming average growth of 3 per cent, the contribution rate would

need to be raised to 28.4 per cent immediately. Alternatively, pension expenditure could be lowered by 15 per cent. However, the extent of the needed

parametric reforms could be moderated by measures encouraging greater labour

force participation.

Luxembourg has considerable scope to encourage greater labour force

participation amongst those close to the official retirement age (see Chapter III).

Currently, the effective age of withdrawal from the labour force is around eight

years before the official standard age of retirement at 65. A principal pathway to

early retirement was through disability pensions, which in the mid-1990s were

received by almost half of all new pensioners (Figure 13). A number of court

rulings up to 1996 resulted in criteria for eligibility for this route to inactivity being

applied more severely, halving the number of new pensions granted and resulting

in a fall in the total number of pensions in payment from 1999. A further reform

was introduced in 2002, offering a new route back to employment for partially

disabled people. Another route for retiring before the standard age of retirement

at 65 is the early retirement pension (pension de vieillesse anticipée). This pension is

available after 40 years of actual contributions from age 57, or after 40 years of

actual and imputed contributions from age 60.38 It is paid at the same rate as if the

retiree had taken the pension at the official standard age of retirement. This route

to retirement is taken by two-thirds of all men but only one-third of women, as

women have fewer years of contributions. Nonetheless, the average age at which a



© OECD 2003



Fiscal policy



51



Figure 13. Type of pension for first claimant

Male



Per cent



Female



Per cent



100



100



90



Normal



90



Normal



80



80

Early pension



70



70



Early pension



60



60



50



50



40



40



30



30



Disability pension



20



20



Disability pension



10



10



0



0

1986 88



90



92



94



96



98



00



1986 88



90



92



94



96



98



00



Source: Inspection générale de la sécurité sociale (IGSS), 2002.



long-term pension is drawn is the same for women as men, as a much higher

proportion of women than men take a disability pension. Unemployment duration

is also longer amongst those approaching the eligible retirement age, though the

authorities are trying to help older unemployed workers to find a new job.

However, achieving greater labour force participation of the elderly is proving to

be difficult. A scheme introduced in 1999 to encourage older workers to work

part-time as a transition to retirement failed to attract a single applicant.

Conclusion

The pension system in Luxembourg offers retirees an exceptionally

generous pension, effectively eliminating any decline in resources on retirement.

Over the very long term, the system would not appear to be sustainable with

current contribution and benefit levels, though the scale of the required adjustment is not large provided that the economy continues to grow at 4 per cent.

However, the current adjustment rules will result in a delayed adjustment and

place extra burdens on future generations. The authorities should adopt a more

forward-looking rule aimed at stabilising the contribution rate and asset levels of

the system over a much longer time period. In this context, the pension increases,

adopted in 2002, went in the wrong direction. The future of the pension is more



© OECD 2003



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OECD Economic Surveys: Luxembourg



vulnerable to shocks than most, as the economy is very specialised. This suggests

a prudent view of the future should be adopted, favouring the accumulation of

assets. Over time, some lowering in replacement rates might be considered,

especially as income adequacy is ensured via the minimum pension. Secondly,

incentives for early retirement should be eliminated by lowering early retirement

pensions on an actuarial basis in relation to a pension taken at the official retirement age (to reflect the longer expected payment period) and by reducing the

ease with which imputed contributions can be obtained. Thirdly, the standard

retirement age (and the minimum number of years of contributions) should be

indexed to rising life expectancy. The authorities should carefully monitor the

recent reform of eligibility requirements for disability pensions and should act to

prevent other routes being used as substitute pathways for early retirement.



© OECD 2003



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