The law of 20 December 2012 on the pension reform entered into force on 31 January 2013.
The main points of the Luxembourg pension system remain the same. It is still a distribution system based on intergenerational solidarity via the formation of an obligatory reserve financed via contributions. The criteria for eligibility for early retirement between 57 and 60 remain the same, as well as upholding the legal age of 65 and the level of the replacement rate.
The current structure for calculating pensions also remains the same: a flat-rate and pro rata enhancement component supplemented by an end-of-year allowance. The changes mainly relate to the rates applied to these increases in the pension formula. The biggest change affects maturing pensions. The reforms aim to progressively adapt the different elements of the pension formula and to adapt the rate of increase in order to encourage insured parties to prolong their professional lives.
The reform also aims to encourage continuous or optional insurance by reducing the minimum contribution from 300 to 100 euros per month.
With regard to entitlement, the draft maintains the current provisions: the effective and supplementary periods necessary to be eligible for an old age pension, the minimum pension and for the acquisition of flat-rate components remain unchanged. With the entitlement for early retirement at 57 or 60 years of age, the insured party must however accept the cut introduced by the modification of the pension formula which will take effect over time. Insured parties who are currently close to retirement shall not be, or shall only be slightly, affected by these changes.
In order to keep old people in the workforce, it is possible to draw an early retirement pension and a salary simultaneously without the pension being reduced by up to half.
Furthermore, to encourage the combination of a pension and a partial paid activity, the reform aims to increase the minimum reference ceiling from 120% to 150% of the social minimum wage. For a retirement pension at 65 years of age, it is possible to draw a pension and a salary simultaneously without any reduction in the ceiling.
For invalidity pensions, it is possible to combine a salary and pension without any reduction in the latter as long as the income does not exceed a third of the social minimum wage.
The reform aims henceforth to differentiate between the revaluation of wages used to calculate the pension and the pension readjustment mechanism.
The first mechanism ensures the full revaluation of the insured party’s wages at the time he goes into retirement. It compensates for the variation in the level of the insured party’s wages as compared to the level of wages in the economy at the time of calculation / liquidation of the pension.
The pension readjustment mechanism aims to readjust pensions in payment in line with cost of living trends measured by changes to wages. In the future, the readjustment mechanism may be eased by a reduction factor when expenditure exceeds revenues from contributions.
The reform shall maintain the end-of-year allowance up until a future increase in the contribution rate, currently set at 24%.