Luxembourg’s General Inspectorate of Social Security (IGSS), a unit within the ministry of health and social security responsible for drafting social security legislation and regulations and auditing social security organisations, recently released a report highlighting growing concerns about the country’s social security finances. The report focuses on increasing expenditure and declining reserves, which could pose significant challenges in the coming years.

Reserve fund

By the end of 2023, Luxembourg’s social security reserve stood at €961.7m, covering 22.9% of the country’s total sickness and maternity insurance expenses for that year. This reserve ratio, often referred to as ‘working capital’, is well above the legally required minimum of 10%, as stipulated in article 28 of the social security code (CSS). For context, Luxembourg’s total annual expenses for 2022 and 2023 were €4.204bn and €3.952bn, respectively, while the reserves were €961.7m and €923.8m, providing a solid financial cushion.

Forecast

However, the IGSS predicts a significant deterioration in the balance between revenues and expenditures. The inspectorate has confirmed to Paperjam that it forecasts a deficit of €37.9m for 2024, which is expected to grow to €160.7m in 2025. Furthermore, between 2026 and 2028, the average annual deficit for health and maternity insurance is projected to rise to €256.9m.

This growing imbalance is a major concern, as it could deplete the reserves, which are expected to fall below the legal 10% threshold by 2027. By 2028, the reserves are projected to be entirely exhausted, resulting in a negative balance sheet. If not addressed soon, this would severely undermine the financial sustainability of Luxembourg’s social security system.

Contributing factors

An IGSS spokesperson told Paperjam that the sharp increase in the projected deficit can be attributed to several factors. The primary cause is a higher-than-expected rise in expenditure, which is expected to grow by 6.6% annually, on average, between 2023 and 2028, compared to revenue growth of just 5.0% annually over the same period. This expenditure growth stems from several factors, including “rising incomes and technical progress that increase population’s health expectations, increasing morbidity resulting from population ageing or from a growth in prices in health sector higher than in other activity sectors (a phenomenon known as the Baumol effect).”

Of note, the situation is further worsened by slower-than-expected employment growth over the next years, as by the national statistics bureau, Statec, and highlighted by IGSS. This slower growth directly impacts social health contributions, which are a major source of revenue for the system. As employment growth falls short of expectations, contributions to the social security fund will increase more slowly, while healthcare costs continue to rise, further widening the deficit, reasoned IGSS.

Projection certainty

Concerning the rapid decline in reserve funds, the IGSS spokesperson assured Paperjam that the projections were based on sound and realistic assumptions. According to the spokesperson, the IGSS has relied on a thorough assessment of the national health fund’s (CNS) financial outlook, including the latest macroeconomic scenario developed by Statec, as well as discretionary measures. “Based on these criteria, IGSS endorses the projections,” the spokesperson emphasised.

If these projections materialise and no corrective measures are implemented, Luxembourg’s social security system could face serious financial instability. With other challenges, such as pension reform, also , the government’s ability to address these concerns is becoming increasingly urgent.