How much will pension reform cost in Luxembourg?

The pension reform being discussed in Luxembourg promises impressive revenues, but also carries tangible costs. According to an analytical note published by Fondation Idea, the key innovation - raising the pension contribution rates for employees, employers and the state - from 8% to 8.5% for each, i.e. from a total of 24% to 25.5% - would raise the budget of the Caisse nationale d'assurance pension (CNAP) by about 500 million euros annually.

This increase will not only strengthen the stability of the general pension fund, but will also help initially to contain the state's expenditure on so-called special pension regimes (referring to employees with special conditions of service, usually in the public sector). These costs are partially offset by contributions, and increasing their share by even half a per cent would save the state "several million euros a year", although the exact amounts have not yet been specified.

Nevertheless, the growing state liabilities are not fully compensated. The new contribution rate also means that the state, as one of the contributors to the general pension fund, will have to contribute 160 million euros more annually than before. This is because the state's share is now also 8.5% of the total payroll.

However, what attracted the most attention of analysts was the fact that the government decided to retain the annual bonus (allocation de fin d'année) - payments that were planned to be abandoned as part of the 2012 pension reform. This cancellation of previously planned savings costs the state about 150 million euros a year, which Fondation Idea calls a lost profit.

Tax relief will also bring additional costs. The tax exemption for increased pension contributions is estimated at 60 million euros a year in lost income tax. The state loses another 20 to 25 million euros a year due to the increase in the tax deduction limit for individual funded pension plans - the ceiling has been raised from 3,200 to 4,500 euros.

Finally, a new tax break for continuing to work after reaching eligibility for early retirement, designed to incentivise people to stay in the profession, will cost the budget another €10 million a year.