Disclaimer
The following article is an opinion piece by the respective author and does not necessarily reflect the position of the FOKUS. party. We stand for diversity of discussion and therefore consider it important to give other opinions the space they deserve.
From the pension system to the asset system
FOKUS.: Social system
It is well known that the Luxembourg pension system is facing various challenges, particularly with regard to demographic developments and the future of social security. The main problems frequently cited are
| Demographic change | Luxembourg has an increasingly ageing population. Life expectancy is increasing, while the number of young people contributing to the system is decreasing in relative terms. This means that fewer and fewer working people have to support more and more pensioners. |
| Dependence on the labor market | The pension system is heavily dependent on contributions from the labor market. Luxembourg currently benefits from a high employment rate, particularly thanks to cross-border commuters. Should employment stagnate or decline, this could jeopardize the financing of the system. |
| Financing and reserves | Although the pension fund currently still has reserves, these are expected to decline in the coming decades. According to forecasts, the system could run into a structural deficit from 2030 or 2040 if no adjustments are made. |
| Unequal distribution and intergenerational justice | There are concerns that the current structure of the system is not fairly distributed between the generations. Young people who pay into the system today could benefit less from it in the future if no reforms are made. |
These are well-known problems. However, there are other social issues that are not addressed by the current pension system:
Assets of the Luxembourg
>95% of Luxembourgers’ assets consist of two products: Real estate (primary and secondary residences) and their pensions. The former is a hidden, illiquid investment that is subject to long-term fluctuations in the real estate market and the timing of market entry and exit and requires external financing on favorable terms in order to be profitable. It is a hidden investment in the sense that residents primarily want to buy a house for themselves and their families and 25 to 30 years later have tax-free assets worth several million euros. The second product, which is often overlooked, is much less intuitive, as pensions today are funded through an intergenerational redistribution system and are only fully available at the time of eligibility (i.e. until retirement age). Luxembourgers have unconsciously decided to limit the core of their personal wealth to illiquid and unavailable products, with the goals of generating a long-term return from the sale of their real estate and living off their pension. The rest of their wealth consists of cars and personal possessions that are constantly losing value and are therefore irrelevant. As a result, many Luxembourgers are asset-rich but cash-poor.
This system has worked well in recent decades, with (relatively) easy access to real estate financing, steadily rising real estate prices, a stable pension fund and long-term economic growth. The system works best when two to three generations of a household have benefited from it.
Heterogeneous population
- The real economy in Luxembourg today is mainly driven by expats and cross-border workers in the financial services sector (and other key industries). There is no reason why an electrician, judge, professor, etc. should earn more in Luxembourg than in neighboring countries – except (1) the fact that certain core sectors funnel a lot of money into the country and into the treasury, which can then be redistributed, and (2) because Luxembourg is small, it is economically possible that there is a low concentration of wealth in various sectors (e.g. the public sector).
- The situation of commuters today and their attitude towards Luxembourg is dramatic. One issue that is not addressed nearly often enough is the general dissatisfaction and the lack of solidarity or sense of belonging to Luxembourg. How dependent is the Luxembourg social system on commuters? How do cross-border commuters vote today (left/right) and does their political stance correspond to Luxembourgish values and the demands of the labor market? How many cross-border workers will be needed in 2050 to ensure economic growth? Are we sure that cross-border commuters who are parents will recommend their children to work in Luxembourg in 2050?
- The expats that will be needed in 2050 to finance the redistribution system would probably not even be able to find Luxembourg on a map today.
The system of redistribution between generations makes a lot of sense in a homogeneous population, where redistribution takes place from parents to grandparents and from children to parents within the same population group. In a population with a high proportion of foreigners, where by 2050 the working population of cross-border workers will be larger than that of domestic workers and will have to be supported by expats from third countries, the system of redistribution between generations can be questioned. A large proportion of pensions are currently paid abroad. By 2050, this will be an overwhelming majority.
Unquantified solidarity and lack of transparency
How much money have I paid into the pension fund during my career? How much return would I have achieved if I had paid this money directly into the pension fund? These are very simple questions, but the answer is deliberately concealed and not communicated. The current system reflects a mentality that “the state will take care of everything” and does not allow people to get actively involved.
Many ideas, such as increasing the minimum pension, are put forward without quantifying the individual impact per person. Yet these effects are easy to quantify. How much of my money will be redistributed, and is this redistribution fair and social? Is social policy being pursued with my pension? The positive thing about solidarity is that it is quantifiable. This must be used.
Income vs. assets
Luxembourg is known for calculating everything on the basis of income (e.g. entitlement to unemployment benefit, cost of living allowance, taxation, etc.). In a country where many people are asset-rich but cash-poor , it is possible to own a property worth over a million euros and receive unemployment benefits at the same time. At a certain point, however, it is important that a society shifts the focus from income to wealth and adopts a better measurement of individual wealth, including in terms of taxation.
SOLUTION
The current ideas of various parties are not aimed at solving the existing problems, but rather attempt to preserve an old, unsustainable and unfair system by compensating for long-term liquidity problems. The ideas are always the same: Increasing employee and employer contributions, longer working lives, raising the retirement age, capping contributions, etc. Parties that want to be more socially progressive want to implement these measures gradually (e.g. gradual increases in contributions, regular increases in the retirement age, etc.). These are the same ideas with varying degrees of political sensitivity.
We propose more innovative, long-term solutions to these problems, even if this requires a paradigm shift:
Phase 1: Generalization of investments from birth to the age of 21 through the introduction of a 4thpillar
Everyone born in Luxembourg must have an investment account at birth (or upon arrival in Luxembourg) into which a fixed minimum amount is paid every month until the age of 21. Luxembourg is known as the second largest investment fund center in the world, but most Luxembourgers do not have an investment account and do not invest in the products that make the country rich.
Luxembourg should develop an investment mentality and young adults should be encouraged to invest early on. The contribution of, for example, €250 per month should be financed by parents, the state and employer/employee benefits (including tax benefits). This amount is less than the current child benefit.
This system enables every Luxembourg-born resident to accumulate assets of around €100,000 (excluding fees) by the age of 21, even though only €63,000 has been invested. If no further contributions are made, this amount increases to an annual net return of 5%:
| Age 56 | 60 | Age 65 |
| EUR 700,000 | EUR 700,000 | EUR 900,000 |
This alone would close the gap in the current pension imbalance.
In the second quarter of 2025, the minimum wage for a full-time position in Luxembourg is € 3,244.48 (equivalent to a contribution of € 551.56 (2 x 8.5 %) per month to the current redistribution system (employer and employee contribution), which is used to offset current pension payments). An initial investment of EUR 100,000 at the age of 21 would lead to the following result with a net return of 5% including pension contributions:
| 30 years of employment | 35 years of employment | 40 years of employment |
| EUR 900,000 | EUR 1.2 million | EUR 1.55 million |
This does not take into account indexation, wage increases, personal contributions, etc.
This system would not only eliminate the imbalance in pensions, but also promote a new culture of investment and wealth creation in Luxembourg. It is important that we as a society support this new idea and thus ensure a secure and prosperous future for our younger generation.
As part of the EU’s strategies for a Savings and Investment Union (SIU) and Pan-European Personal Pension Products (PEPP), the average citizen should have easier access to liquid and semi-liquid products.
The proposal provides for the creation of a new product that allows direct investment in the pension fund in addition to the pension fund. Currently, the pension fund is the sole shareholder of the pension system (Fonds de compensation commun au régime général de pension, FDC). A parallel investment in the FDC would guarantee people the same return (around 5% per year). There are now products that allow children to invest in shares and other financial products. However, these financial products are held in the parents’ names or, if they are in the children’s names, are only available to them from the age of 18 for ” “. These are savings products, not pension or capital accumulation products. There is currently no known product that enables parents (or the state) to set up a long-term wealth plan for children in order to prevent poverty in old age and strengthen the pension system.
Phase 2: From the pension system to the social system; from the pension fund to the Luxembourg social plan.
A paradigm shift is needed to solve the current problems.
From January 1, 2026, 25.5% of all salaries will be paid into the pension system (8.5% each from the employee, employer and state budget). This is considered Pillar 1. Employees (Pillar 2) and employers (Pillar 3) can continue to invest in additional pension products on a voluntary basis.
A well-functioning wealth system does not need three (or even four) pillars. Especially not when two of them are optional and not universal and are usually only accessible late in working life. Virtually every employee in Luxembourg is automatically affiliated to Pillar 1. At the end of October 2025, this corresponded to around 527,649 active employment contracts. According to the Association Luxembourgeoise des Fonds d’Investissement (ALFI), around 1.5 billion euros are concentrated in Pillar 3, for around 13,000 members. This corresponds to less than 2.5 percent of the working population covered by Pillar 3. A similar amount can be found in Pillar 2, but spread over around 135,000 people. However, this Pillar 2 is more of a savings product, as the money can generally be used after ten years. The conclusion is clear: Pillar 2 is not universal and does not benefit everyone to the same extent. Pillar 3 is even more restrictive and is an exceptional mechanism that only benefits a minority of people, mostly in certain sectors or with certain employers. For the vast majority of employees, these two constructs play no real role in their everyday lives. It is therefore fundamentally problematic to speak of “pillars”, as this term suggests an equivalence that does not exist in reality. The effects of the various measures are extremely unfavorably distributed and, for most people, do not have the systemic significance that the term implies. There is no reason to pursue these pillar strategies in parallel with different target dates, different products, different tax incentives and returns.
The current pay-as-you-go system is to be converted into a funded system . Instead of using the contributions currently paid by employees to finance the pensions of those who have already retired, each individual pays into an investment fund (the Prosperity Fund) where the money is invested. When you retire, you receive your own savings and the accrued interest.
This model has no restrictions on working age and no target retirement age. Everyone can decide individually when they want to retire if they feel they have accumulated sufficient assets. Therefore, the term “pension” is no longer appropriate – the system becomes a wealth system in which everyone tries to build up considerable private wealth.
One of Luxembourg’s greatest strengths is our solidarity. It is not about creating a completely individualized system in which everyone works and contributes only for themselves. We must therefore guarantee a solidarity-based pension system and a minimum pension. Every person who is legally resident in Luxembourg at a certain age should receive a guaranteed minimum pension, regardless of their individual contributions. A kind of “basic income for older people”. The minimum age should be 65 and then be adjusted according to the development of life expectancy. This should be financed from tax revenues and not paid out of the recipient’s capital. Currently, from January 1, 2026, 8.5% of contributions (the state’s share) are already financed from tax revenues. Therefore, this would essentially be a form of tax redistribution.
Employers and employees should invest in an investment fund. This could be a fund for all companies in a particular industry, a fund that works for a particular company, or a fund for a group of people working in certain (e.g. medical) professions. It could also simply be the current FDC. Participation in a particular sector fund could be made compulsory for the whole sector in certain circumstances. Participation is mandatory but should also provide a degree of flexibility in the choice of investments. A fund operates on a capital funding basis: an employee, together with their employer, accumulates rights from the contributions paid and the earnings of the fund over the years through the collective investment of these contributions. Tax concessions apply to the accumulation of capital up to a certain income-related amount.
The goals of this structure are to create a wealth system where everyone knows how much wealth they have at any point in their career.
The new system enables the wealth plan to be maximized. It is important to pay into the plan as early as possible (ideally from birth).
Phase 3: Maximization of the Luxembourg asset plan
The 8.5-8.5-8.5 rule should be changed and the total amount increased by at least 3 percentage points:
- Part of the state contribution of 8.5% should be used as a redistribution of tax revenue to guarantee a minimum pension in old age.[1]
- Currently, there are already tax benefits where employers pay an additional 3 or 4% (up to the S1 cap) and 8-12% (for anything above the S1 cap) into the (current) Pillar 3. Instead of offering different products under different pillars, the employer contribution should be increased to at least 10% (with further tax incentives to increase) and paid directly into the (new) wealth fund.
- All employees should make a minimum contribution of 10% to their own plan. As this money is used for investment and not as a payment for other generations, this should not be controversial as it is ultimately profitable for all employees.
The current pension system continues to be unfair in that the actual contributions (including returns) remain in the pension fund and only a fraction of the contributions are paid out to pensioners. The actual contribution is not taken into account. The amount currently paid out is calculated according to a complex set of mathematical rules.
In order to vote for the new system, a new administration would have to be set up (and the current one abolished) with the goals of maximizing the wealth of the population. Ideally, this would be a partnership between the private and public sectors, ensuring that professionals are entrusted with maximizing the individual wealth of everyone in Luxembourg. The development of financial literacy and intensive and sustained investment in financial education is an absolute necessity for an economic and wealth system geared towards sustainability and stability. Only if citizens develop a comprehensive understanding of saving, investing, risk and long-term planning at an early stage can they make informed decisions about their own financial future. Serious financial education must not be limited to voluntary initiatives or individual privileges, but must be broadly accessible, structured and integrated into the entire professional life cycle. It is not only an instrument of individual responsibility, but also a basis for strengthening social cohesion, reducing inequalities and the long-term sustainability of the public system.
[1] It is legitimate to ask why the Luxembourg state pays 8.5% into the pension system for each employee. Wouldn’t it be more logical and intuitive to take 17% of an employee’s salary and reduce each employee’s tax burden by the same amount, instead of taxing the employee and using part of this tax revenue to fund the pension system? The reason is relatively simple: taxation and redistribution gives the state more power to distribute revenue and provide benefits to a certain category of taxpayers (through redistribution and tax incentives). This is a blatant example of how the current pension system is used for hidden social redistribution.
