When it comes to public pensions, Luxembourg could learn from Canada’s success

Luxembourg is among the richest places in the world. It is a small, landlocked European country, but has carved out a niche as a major financial centre. Yet its public pension system could benefit from adopting a capitalized pension model, according to research by Patrick Augustin and Sebastien Betermier, both Associate Professors of Finance at McGill Desautels. A capitalized pension fund invests the pension contributions of current workers to pay for retiree benefits in the future. Countries like Canada, Australia and Sweden have this type of model, and their pension funds yield higher returns because of it, but Luxembourg currently has a pay-as-you-go model, meaning that contributions made by current workers are used to pay for the pensions of current retirees. Adopting a capitalized pension model would allow Luxembourg’s pension fund to invest in different types of assets that can yield bigger returns, such as infrastructure. Augustin and Betermier found that a capitalized model allows a country to accumulate two to three times as much capital as a pay-as-you-go one.