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By Cyrille Schwellnus and Simone Romano
Despite several major shocks and the recent slowdown, Luxembourg has grown vigorously over recent decades. Living standards are among the highest in the OECD. The stable institutional framework, responsive regulation and a relatively favourable tax regime have attracted foreign investment and foreign workers.
Yet, the growth model based on rapid labour force expansion has reached its limits. Productivity has stagnated over the past 15 years, congestion has increased and housing has become less affordable for many residents. Moreover, Luxembourg faces rapidly rising pension expenditure over the next decades, as the number of pensioners will more than triple over 2024-2070.
Policies fostering the transition to a more sustainable growth model based on skills and innovation need to be prioritised, while ensuring the sustainability of the pension system and addressing climate change.
In this context, the new 2025 OECD Economic Survey of Luxembourg contains three main messages:
• A comprehensive reform to curb pension expenditure and raise revenue is needed in the near term to secure the system for future generations and prevent more disruptive changes at a later stage.
• Boosting skills by upgrading training, refocusing public support for innovation and strengthening competition, especially in services, would help to reinvigorate stagnating productivity.
• Continuing to develop public transport and alternative mobility options, while bringing fuel prices more in line with neighbouring countries and making the tax regime less advantageous for cars with internal combustion engines, would help Luxembourg reach its climate targets.
Balancing the pension system in the long term while safeguarding inter-generational fairness and competitiveness requires a multipronged approach and fast implementation. The horizon over which periodic reviews assess the balance of the system needs to be extended from 10 to 50 years. Setting a steady-state contribution rate that balances the system over 50 years and phasing it in early would ease the burden on future generations by allowing larger working-age cohorts to contribute more, while the pension reserve fund would grow through financial returns.
Raising the effective retirement age, which is the lowest in the OECD, would further help to put the system on a sustainable footing. Eligibility for early retirement should be tightened by removing educational years from the calculation of contributory years, aligning benefits with actual work history. At the same time, early and statutory retirement ages should be raised to match gains in life expectancy.
Pension benefits need to be brought more in line with other OECD countries, as the relative income of older people is the highest in the OECD. Shortening the transition to the lower replacement rates of the 2012 reform from 40 to 25 years would contribute to a slower depletion of assets in the pension reserve fund. Switching from nominal wage indexation of pensions in payment to inflation indexation – as is common in OECD countries – would ensure that current pensioners contribute to the reform effort.
Transitioning from a growth model based on rapid labour force growth to a model based on skills and innovation requires reforms to innovation, skills and competition policies. Establishing a coordination mechanism between the main actors providing public innovation support, shifting more from institution to project-oriented support and strengthening the role of public-private partnerships would crowd-in more business R&D investment.
Quality standards for training providers could be strengthened through the creation of a national accreditation agency, as well as the tightening of quality control on training providers. Enhancing the targeting of financial incentives for adult learning and more proactive guidance would increase the participation of low skilled and older workers. Requiring full disclosure of the identity of interest groups and public officials that were involved in lobbying activities and introducing sanctions for lobbyists who do not enrol in the dedicated public register would limit the scope for incumbents and larger firms to shape regulation in their favour at the expense of smaller firms. The quality of regulation could be further improved by introducing ex-ante and ex-post evaluations of the impact of regulation on competition and requiring the use of plain language in drafting new laws.
Luxembourg has made substantial progress in reducing emissions, but further efforts are needed to reduce emissions in sectors not covered by the EU Emissions Trading System by 55% by 2030 and to reach net zero emissions by 2050. Continuing to expand the public transport infrastructure and increasing the frequency and capacity of trains would help to ease congestion and boost overall system capacity. Measures are also needed to limit congestion during peak hours, including by better linking land planning and public transport development.
The reliance on combustion engine cars is high, supported by low taxes on cars and fuel. Setting a clear, forward-looking trajectory for the taxes on motor fuels that goes well beyond 2027 and brings the final fuel price more in line with that of neighbouring countries would reduce fuel tourism and the use of private cars. Increasing the registration tax on new cars and making it dependent on emissions, while introducing road tolls and reserving road lanes for buses and carpooling would encourage the transition to more sustainable commuting options.
For more information, visit the Luxembourg snapshot page.
References
OECD (2025), OECD Economic Surveys: Luxembourg 2025, OECD Publishing, Paris,
https://doi.org/10.1787/d01c660f-en.