Alternatives for Financing Social Security in Luxembourg by Resident and Cross-Border Households

Given the rapidly evolving structural socio-demographic determinants in Luxembourg (ageing, migrations, cross-border households) and social needs induced, the concern about the funding of the Luxembourg social security system is high on the agenda. This concern could become even more pressing over time, given Luxembourg’s specificity in several respects. According to the 2024 Ageing Report of the EPC’s Ageing Working Group, Luxembourg might face an increase of age-related expenditure from 17.2% of GDP in 2022 to 27.9% in 2070, mostly due to pensions (+ 8.3% of GDP over the period). This is the biggest increase expected in EU-countries, a first particularity for Luxembourg. A second specificity is the importance of cross-border commuters in the Luxembourg economy. These represent 43% of total employment in 2022. Given such a context, the country’s social players are looking for avenues of reflection for future concrete proposals. This paper precisely aims to contribute to such a debate. It examines day-after impact of hypothetical parametric changes in social contributions and personal income taxes (the “alternatives”) on the distribution of household disposable income and total public financial receipts from these sources for Luxembourg. Moreover and given the importance of cross-border commuters for the country, we need a microsimulation modelling −EUROMOD-based− covering both residents and cross-border commuters’ households, the latter population involving an essential innovative extension to previous assessments. We emphasize the structural discrepancies between residents and cross-border households in terms of socio-economic status as well as regarding gross labor and taxable income. Consequently, we show that total receipts from residents are greater than those from cross-border households, even when controlling for population size. Next, we examine 42 alternatives based on the concerns of a key Luxembourg social partner in the context of an ongoing public debate. This examination takes into account the values achieved for a triplet of standard indicators chosen for their simplicity and acceptability to a broad public, and this within the framework of an independent external expertise: total revenues (cross-border households included), the inequality Gini coefficient and the poverty rate (the latter two for the resident population only). We then complete our detailed overview with an evaluation of each alternative according to the selected dimensions altogether. Finally, we evoke a basic “Global Performance Index” which may enlighten conclusions derived from a one or two-dimensional analysis. Although the analysis is specific to Luxembourg, the policy alternatives and methodology considered here may also be relevant for other countries with comparable socio-economic fundamentals, particularly in the context of the EU-wide concern regarding the fiscal implications of population ageing.