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LUXEMBOURG- Luxembourg’s government has introduced radical and generous reforms to the country’s first pillar state pension that will produce higher basic pensions and provide incentives to retire later.

Luxembourg’s basic state pension of e300 per month has risen 11% while the second element of the PAYG system is up almost 4% under new legislation passed earlier this month.

A so-called proportional pension, the second element of the state scheme, used to pay 1.78% of average career earnings but the government has raised this to 1.85%. Modest as this may appear, it represents an increase of 3.9% for the country’s 100,000 pensioners.

The government has also introduced an incentive to encourage workers to work longer. Officiall retirement age is 65 but in practice many stop working in their mid to late fifties. Under the new legislative package, salaries after the age of 55 will be given a heavier weighting in calculating the lifetime average.

As typical salaries increase in line with experience so a heavier weighting at the end of a career increases the final pot from which the new rate of 1.85% draws.

The government has also promised an annual e500 lump sum for pensioners that have worked and contributed for forty years or more.

A e5bn surplus in the PAYG scheme has made the increases feasible and contribution levels of 24%- split evenly by state, employer and employee- will remain unchanged.

Critics, however, say the reforms are built on an extremely ambitious assumption- average economic growth of 4% in real terms for the next 40 years.

“I don’t think it’s that prudent to build a pensions system on such bullish assumptions, because nobody knows if this assumption is realistic,” says Fernand Grulms, head of the consultants Pecoma.

Luxembourg’s economy has averaged 5% per annum for the last 20 years largely due to booming financial and telecoms industries.

“We know where this growth came from. What we don’t know is where future growth will come from in the next forty years,” he says.

Employers unions have also criticised the plan as short sighted. They believe the surplus should be preserved in case of an economic downturn.

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