The Swiss Pension System
2022, Kind, Axel
Located in the heart of Western Europe, Switzerland is a comparatively small, market-oriented, innovative, and successful open economy. Its pension system comprises three pillars: (i) a mandatory, unfunded, state-run, and highly redistributive public pillar with (near) universal coverage (AHV), (ii) a mandatory, funded, and privately run occupational pillar (BV), and (iii) a voluntary pillar based on personal savings that benefit from a preferential tax treatment. The three pillars are designed to provide satisfactory financial support for Swiss residents of retirement age (currently 65 years for men and 64 years for women). AHV pensions are mainly financed by income-dependent contributions from current AHV members and their employers, a part of revenues from VAT, and tax-financed transfers from the Federal State. With a minimum monthly (full) pension of 1,195 Swiss francs (ca. US$ 1,288), AHV replacement ratios exceed 100% for low-income consumers and decrease with income. Thus, AHV pensions target (but not always achieve) the financial coverage of basic needs. BV pensions are designed to allow old-age consumers to afford the living standards they had before retirement. In particular, taken together, AHV pensions and BV pensions offer replacement ratios above 60% for consumers with an annual income of up to approximately 100,000 Swiss francs. For additional needs, Swiss consumers must rely on tax-deductible private savings (and not tax-deductible free savings) in Pillar 3, for which an array of bank, insurance, and (recently) even FinTech solutions are available. The Swiss pension system allows for moderate flexibility in the first two pillars in terms of the timing of retirement (anticipation or postponement), the type of pension benefits (monthly annuities, lump-sum payments, or a combination of both for the BV pension) and rather high flexibility in the third pillar. Given the steady increases in life expectancy and the persisting low-interest-rate environment, the need for reforms in the first two pillars is largely acknowledged. Such reforms may include (a combination of) the following elements: (i) increases in the default for retirement age, (ii) additional sources of financing for AHV, (iii) higher contribution rates, (iv) an earlier mandatory contribution age, and (v) lower conversion ratios in BV. As several attempts to reform the system have not passed the scrutiny of popular voting in optional referenda, the exact shape of the reform will be the result of intense political negotiations that are still to come.