by Paul Schonenberg
Introduction to the Luxembourg Pension system:
Persons working in Luxembourg are privileged to have the opportunity (and obligation) to be enrolled in the Luxembourg Tier one government pension system. They also may participate in company funded pension systems (Tier 2) and private (Tier 3) privately funded pension systems. The combination of these three systems allows Luxembourg employees to enjoy the most generous benefits of any employees working in Europe.
Under the tier one government pension system (which is the most important of the pension possibilities allowed by law), employees , companies and the government each contribute 8% of the employees salary into the socials security system for at least 10 years and up to 40 years of contributions thereby earning a personal pension entitlement based the employees accrued contributions into the systems. Ideally the government tier one pension system envisions persons retiring at 65 years of age after working for 40 years. In practice, 1/3rd of retirees receive full pensions and 2/3rd only receive partial pensions.
Over the years, this pension system has been adjusted to consider the changing circumstances of the employees participating in the systems. Credits have been given for the time employees have been in school, mothers have become allowed to buy additional pension entitlement years to compensate for work absences while raising children, and provisions have been adopted to allow the transfer of pension benefits from other EU countries. Additionally minimum pension entitlements have been mandated to help persons avoid pension poverty situations and likewise pension income is indexed to keep place with cost-of-living increases…
In all this is a very good program for the benefit of employees based on the principle of employees earning their pensions by their contribution during years of their working.
Why is reform of the Luxembourg national pension system being debated in the Chamber of Deputies?
In the simplest terms, this reform process has been initiated because this self- funded program is running out of money with retirees taking more money out monthly as retirement pensions than currently employed workers are contributing into the system. With the pension fund suffering from negative cash flow, the government has no choice but to make adjustments to ensure long term solvency of the system. The most logical of the fixes is to adjust the retirement age on the basis that people are living longer, a solution being adopted in other countries around Europe and the USA. Not surprisingly, this approach is not popular with the government or special interest groups.
Who are the principal interest groups and what are their positions?
The politicians are quite naturally not interested to alienate voters so there is little enthusiasm for raising the mandatory retirement age.
At the same time, some women’s groups are advocating higher benefits for women arguing that average retirement pensions for men are 36% higher than for women.
The union representing government workers opposes higher contributions by employees or any adjustment of benefits and wants to combine the pension reserves for the government employees which is approaching insolvency with the cash reserves for the private sector which has a higher cash reserve balance. The result of this will be the private sector employee funds moving towards insolvency even faster than at present.
Are the circumstances and needs of the foreign community different from the resident Luxembourg population?
Many foreigners come to Luxembourg later in their careers after completing their schooling and early careers in their home countries because only by then have they achieved the education, skills and experience to be attractive as employees in Luxembourg. As a result, despite many of them having higher than average salaries, they reach the mandatory retirement age of 65 with less than 20 years of accrued pension benefit entitlement and insufficient pensions to live with dignity. As a consequence, many wish to work beyond the age of 65 but find when they do so, despite being required to pay into the pension system along with their employers, they cannot delay the start of retirement and make further pension contributions to earn higher benefit entitlements when they finally do retire. Their only choice is to start retirement and ask for their pension contributions after age 65 to be reimbursed to them.
What is the AmCham recommended solution?
A gentle suggestion to ensure fairness –
The present system which does not allow employees to continue to work and contribute into the state pension system beyond the age of 65 does not fit the times, is harmful to all persons who have earned insufficient pensions (expats who come to Luxembourg after finishing their education and first career employment, women who take career breaks to raise their children, and both the men and women who have insufficient Luxembourg accrued pension benefits because of living and working outside of Luxembourg.
We need to increase the income coming into the pension fund and should both allow and embrace everyone voluntarily wishing to work and contribute into the pension system so long as they want and are able to work.
In addition to improving the economic well-being of these voluntary working participants, allowing these people to remain employed and contributing into social security on a voluntary basis will not only help them financially, buy additionally contribute to their emotional health and well-being to give their life meaning and value to keep them both physically and emotionally healthy.
How can Newsletter readers help?
The current system, despite being well intended, does not align with the circumstances of many women and expats who are valuable contributors into our society and structurally discriminates against their needs and wishes. Allowing these people to work longer beyond the age of 65 on a purely voluntary participation basis, will raise the contributions paid into the system, while immediately reducing pension outflows as a result of delayed pension starts, and do all of this purely on a voluntary basis.
If you agree with this analysis, please share it with your friends and please let us in AmCham know if you and your friends will sign and support a petition to the Chamber of Deputies arguing for this change.