What if every one of us, who worked all his life, was at the moment of retiring only to receive a ridiculous fraction of what he is entitled to?
During the last decades, our country has enjoyed remarkable economic growth which has allowed the creation of one of the world’s most generous pensions systems. This system is now confronted with major challenges, resulting from the demographic and economic development of the country. In fact, the system as it is in place will lead us to certain bankruptcy. In order to finance our pensions, we will have to pass on to the next generations a debt they will not be able to reimburse.
Moreover, we will prevent them from enjoying a decent pension at the end of their working lives, which will probably be the end of their lives as such. Things must change, everyone knows that. But in order to find a solution, everyone must call into question his prerogatives and make sacrifices. In order to achieve that, we need a change in mentalities.
The current situation of the pension regime is a healthy one at first glance. This perception is due to an abnormal level of economic development. Indeed, Luxembourg has benefited from a lengthy period of exceptional economic growth with a growth rate beyond 4%, largely above the normal rate of 1.5%. One has to underline that the current expenditure level of the system is based on the accumulated pension rights of the last 50 years, and that the pension rights of the prosperity period will be claimed and weigh heavily on the system during the next decades.
Either these pension rights, who are already determined today, are financed by a new period of exceptional economic growth, or the pension system will sooner or later collapse if the expenditures are not adapted to possible revenues. The former scenario is not a continuous solution, but provokes a suspending effect. One exceptional period of growth necessitates another in order to cater for the rights that have been created. It is thus a “perpetual mobile”, meaning that after every generation (about 25 years) the number of the working population will have to double (350,000; 700,000; 1,400,000; 2,800,000; 5,600,000...).
Windfall and curse
More than five million people working on our territory will be needed to finance the pension system in 100 years, and in 400 years the earth’s population would not be sufficient. This problematic situation is amplified because of the increasing ageing of the population. Given that the former scenario is illusory in the long term, we are forced to make corrections to the system and adapt our benefits to a more normal and realistic growth rate.
The system has constituted over the years an enormous reserve, representing nearly four times the yearly expenditure today. Without changes, this reserve will only represent one year of expenditure in 20 years. It is a windfall as well as a curse. On one hand, it allows to introduce reforms progressively in order to make them less painful. On the other hand, it allows exceeding the pure distribution premium, which is the contribution rate necessary to cover the annual expenditure of the effective contribution rate. This means that after the depletion of the reserve a double correction will be necessary: one will have to adjust the pure distribution premium onto the contribution rate, either through a reduction of benefits, or by increasing contributions, or one will have to continue to make substantial corrections in order to finance the continuous increase of pension benefits. There will be more pensioners, as there will be more departures than arrivals and the most recent pensioners will have accumulated a higher level of rights due to higher salaries during their working lives.
It is true that a current correction of the pension system – in the sense that pensions resulting from a complete career under minimum wage would remain unaffected and that the amount of pensions exceeding this threshold would be frozen- would at first sight not bring about vast savings when compared to the expenditure in the next decades.
However, corrections can be spread out over a longer period. This would have the advantage that the economy would dispose of more time to adapt to these changes; old people’s homes for example would have more time to adapt to the new situation of their pensioners, a non-negligible aspect. Such a measure would also represent a symbolic gesture of solidarity between generations.
Risk of divisions
The reform proposed by the Government which is currently being discussed does not foresee that current pensioners are affected or that workers close to retirement are to considerably contribute more. This law sanctions a status quo, in full knowledge that the system will collapse in the next 20 years. Measures that are foreseen, but only partially stipulated in this law, will only take effect in the twenties of this century. These adaptations are first too late and second insufficient to guarantee the survival of the system.
The calculation of pensions will become even more complicated, the transparency of revenues and expenditures will be even less comprehensible. The reform will divide the population between highly educated people and people with a low level of education, as it focuses on the length of the training period instead of focusing on the age of retirement. If one were to focus on the retirement age and if one were to introduce a retirement age factor, one would get a complete neutralization of the risk related to retirement age.
The risk would no longer be a problem of the system as it would be transferred to the public treasury. The individual who decides to retire earlier or later will have to assume the negative or positive consequences of his choice. The problem of hard and toilsome labor is not a problem of the system, as it is predictable, and counter-measures can be taken.
The introduction of a revalorization and readjustment factor in combination with the scrapping of the end of year complement, as foreseen by the reform, entails that the smaller pensions will in the long run become insufficient. The State will have to intervene through the national solidarity fund in order to allow a decent standard of living to those affected. Substantial expenditures for central government will be indirectly caused; a reality which is not mentioned.
The reform foresees a tripartite and joint financing of subscriptions and an increase of the subscription rate of three times 10% is foreseen for the 2020s. As this level is understandable for employers and employees, at no point it is mentioned in the legislation or the explanatory annex how the State can finance these obligations. This is especially problematic as revenues coming from the e-commerce sector will be transferred to the country of destination and that revenues coming from fuels are not eternal. Moreover, changes having a negative effect on our tax revenues are foreseeable in the tax policy of the European Union.
Straight into the wall
The economic slowdown resulting from a transfer of pensions towards bordering countries will represent the most important part of GDP. Allowances leaving the country are to be economically considered as our country’s debt towards other countries. This money will never come back into the national economic circuit. During discussions on pensions this aspect is so far ignored.
To sum up, if we do not react in adequate manner, all the allowances for pensioners will be lower in the future. To maintain the current level or the level foreseen by the law is an illusion. If necessary reforms are not immediately transposed, tomorrow’s reforms will be socially harder and the margins for maneuver will be more limited.
An insufficient and late reform, future lower revenues for the State and a bad analysis of the situation do not make good ingredient for a successful pension reform. This premise combined with the resistance of certain actors to change will lead us straight into a wall. However, discussing openly and offensively problems in order to find better solutions will avoid the collapse of the system and safeguard the social cohesion of our country.