LUXEMBOURG – Luxembourg’s pension system, although well developed, is vulnerable and may be facing a “vicious circle”, a new report says.

“The pension system has developed well thus far but it remains a potential source of vulnerability,” the report from the International Monetary Fund states. It said the system has accumulated significant assets and offers high-income replacement rates.

“However, the system remains vulnerable on two fronts,” the IMF said. “First, population ageing will put pressure on pension expenditure. If these are not met by levying higher contributions, the country’s economic growth might suffer.”

The second area of potential concern was the danger that “large shocks” could hit the flow of commuters and migrants to Luxembourg – “thereby causing a vicious circle of falling output and employment and rising contribution rates”. The IMF said commuters account for about a third of the labour force.

The IMF said it has a long-standing recommendation to Luxembourg to consider developing a mandatory, fully-funded pension pillar because of the mobile contribution base.

“The reason is that such a pillar offers a measure of protection against significant economic shocks, to which Luxembourg is more formally exposed than most countries because of its highly mobile workforce.”

But it said that while no such pillar has been developed, the government has fostered private retirement saving with tax incentives as well as reducing the abuse of early retirement schemes.

The IMF has called for a formal link to be made between the statutory retirement age and life expectancy, as well as between the replacement rate and the contribution rate.