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The sustainability of the private sector pension system from a long-term perspective: the case of Luxembourg

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  • Muriel Bouchet

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    Abstract

    Many projections have been made in different countries in order to assess the long-term prospects of the pension system. Updated projections are less frequent in Luxembourg. The paper contributes to fill this gap. Such an exercise is informative not only from a Luxembourg viewpoint. Luxembourg is indeed the epitome of a small, open economy, characterised by large inflows of cross-border and foreign employees. The experience of Luxembourg may therefore magnify some issues that are also of relevance in bigger countries, where they are not addressed in an explicit way because they are overshadowed by purely internal demographic and economic factors. The first part of the paper is a digression about the concept of fiscal sustainability and the most relevant indicators of sustainability. The theoretical literature in this field is somewhat inconclusive, as no clear-cut and widely accepted indicators of fiscal sustainabilty could be derived. A pragmatic approach based on the Maastricht reference values has therefore been privileged in the paper. The second part draws the attention on the current situation of the Luxembourg private pension system. This situation is extremely favourable at first sight, as the private regime has recorded large surpluses over the last years, the sedimentation of which gave way to reserves in excess of 20% of GDP. However, as illustrated in the rest of the paper, one should not conclude from these static pieces of evidence that the private pension regime is sustainable. The third Part describes the pension model used by the BCL, which extends to 2085. The salient result is that the currently favourable situation of the pension system reflects a very high rate of economic growth in the nineties and also the inflow of large contingents of cross-border and foreign employees. Since these employees are relatively young, they are currently net contributors to the Luxembourg pension regime. However, the reverse situation is bound to prevail when they will retire. Under some reasonable assumptions, this evolution would even gives way to a large debt ratio and the situation would further deteriorate if immigration or the inflow of cross-border workers were to loose their momentum. These results illustrate the need for dynamic analyses in a small, open economy such as Luxembourg. They also highlight the vulnerability of the pension system to factors that are to a large extend beyond the reach of the national authorities, like immigration and the availability of a large pool of non resident employees.

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    File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/6/BCLWP006.pdf
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    Bibliographic Info

    Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 6.

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    Length: 60 pages.
    Date of creation: Jan 2003
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    Handle: RePEc:bcl:bclwop:bclwp006

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    Web page: http://www.bcl.lu/

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    1. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter.
    2. Alan J. Auerbach, 1997. "Quantifying the Current U.S. Fiscal Imbalance," NBER Working Papers 6119, National Bureau of Economic Research, Inc.
    3. Philipp C. Rother & Marco Catenaro & Gerhard Schwab, 2004. "Aging and Pensions in the Euro Area," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 593-, December.
    4. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational accounting: a new approach for understanding the effects of fiscal policy on saving," Working Paper 9107, Federal Reserve Bank of Cleveland.
    5. Muellbauer, John, 1992. " Generational Accounting: A New Approach to Understanding the Effects of Fiscal Policy on Saving: Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 319-22.
    6. Nicola Sartor & Laurence J. Kotlikoff & Willi Leibfritz, 1999. "Generational Accounts for Italy," NBER Chapters, in: Generational Accounting around the World, pages 299-324 National Bureau of Economic Research, Inc.
    7. Alan J. Auerbach & Jorge Braga de Macedo & Jost Braz & Laurence J. Kotlikoff & Jan Walliser, 1999. "Generational Accounting in Portugal," NBER Chapters, in: Generational Accounting around the World, pages 471-488 National Bureau of Economic Research, Inc.
    8. Auerbach, A.J. & Gokhale, J. & Kotlikoff, L.J. & Steigum, E.Jr., 1993. "Generational Accounting in Norway: Is Norway Overconsuming its Petroleum Wealth?," Papers 06-93, Norwegian School of Economics and Business Administration-.
    9. Robert Haveman, 1994. "Should Generational Accounts Replace Public Budgets and Deficits?," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 95-111, Winter.
    10. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    11. David Bradford, 1991. "Tax Policy and the Economy, Volume 5," NBER Books, National Bureau of Economic Research, Inc, number brad91-1, octubre-d.
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    Cited by:
    1. Olivier Pierrard & Henri R. Sneessens, 2009. "LOLA 1.0: Luxembourg overLapping generation model for policy analysis," BCL working papers 36, Central Bank of Luxembourg.

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