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Credit Suisse pension study 2020: Early retirement – the path is becoming more difficult
Credit Suisse publishes study on retirement provision in Switzerland
Many Swiss citizens want to retire early – and around half of them actually manage to do so. Early retirement is particularly widespread among single people, people with higher incomes, and people living in French-speaking Switzerland. Credit Suisse economists have calculated the financial shortfalls associated with early retirement: For people in the middle-income bracket, drawing the AHV pension and employee benefits insurance pension two years early results in a reduction in income of approximately 14% over the course of a person's life. Drawing pension fund benefits at the age of 58 results in a shortfall of as much as 23%. In view of declining pension fund benefits, the path to early retirement will likely become more difficult again in future.
There is a widespread desire to take early retirement in Switzerland. But what, in reality, is the attitude of the Swiss population toward retirement? The study published by Credit Suisse today shows that a significant proportion of Swiss citizens do indeed retire before the normal AHV retirement age (64 for women, 65 for men). While only 8% of women and 10% of men draw their AHV pension early (at most two years in advance), it is far more common to receive pension fund benefits early (women 43%; men 46%). In terms of the age at which a person describes themselves as retired, just over half of people retire at least one year before the normal AHV retirement age (women 47%; men 56%). Early retirement is particularly widespread among single people, people with higher incomes, and people living in French-speaking Switzerland. However, nearly a quarter of early retirements are involuntary, with employees with a lower level of education or a lower household income more often affected by involuntary early retirement.
Early retirement can potentially reduce income by over 20%
Early retirement usually results in a lifelong pension shortfall. In their study, Credit Suisse economists use different scenarios to show how the choice of when to retire affects pension income derived from AHV and employee benefits insurance. For a man in the middle-income bracket (e.g. a teacher), drawing his AHV and pension fund benefits two years early results in a lifelong reduction in pension benefits from CHF 49,823 to CHF 42,742 per year (CHF 4,151 to CHF 3,562 per month) – a reduction of 14% compared with drawing the AHV and pension fund benefits from the age of 65. If he defers drawing his AHV pension until the age of 65, the pension fund benefits are still reduced by 8% if drawn from the age of 63 and by 23% if drawn from the age of 58. Furthermore, these reduced pension fund benefits and, ideally, a bridging pension or the consumption of capital (private assets, Pillar 3a) must finance living expenses until AHV benefits are drawn. In addition, AHV/IV/EO contributions must continue to be paid until the normal AHV retirement age. These contributions total between CHF 496 and CHF 24,800 per year, depending on pension income and assets. When considering early retirement, it is essential to take the financing of these contributions into account.
Credit Suisse economists' simulations show that the percentage pension shortfalls in lower and higher income brackets do not vary much. When giving up work at 63, a person in the higher income bracket (e.g. a lawyer) will see a fall in his life-long pension income of about 9% from the time he draws his AHV pension at the age of 65. If he retires at the age of 58, his pension income will fall by approximately 24%. For lower income brackets (e.g. a retail worker), the figures are -8% and -21%, respectively. The starting position differs, however: A retail worker retiring at the normal retirement age of 65 could expect to receive an annual pension of CHF 38,112, which equates to around CHF 3,200 per month. If he retires at age 63, his annual pension would be CHF 35,137, and if he retires as early as age 58, it would be CHF 30,062 – equivalent to a pension of CHF 2,500 per month. In addition, the pension fund pension of approximately CHF 9,000 per year would need to last until the AHV pension can be drawn. Without additional personal savings, early retirement would likely remain a dream in this scenario.
Early retirement likely to become a more distant prospect in the future
The losses are significant and the path to early retirement may become even more difficult, as the pension situation in Switzerland will deteriorate considerably in the future without far-reaching reforms. The pension comparison across several generations of employees produced by Credit Suisse economists shows that early retirement from professional life will become much more difficult for future generations to finance. In fact, asset accumulation by current workers has been significantly curbed as a result of the low interest rate environment. Further, a lower rate of interest has been paid on their retirement assets for years, since a proportion of the yield must be used to finance the excessive pension payments pledged to current pensioners. Finally, conversion rates are falling across the board. Adjusted for purchasing power, the real value of pensions in the middle-income bracket will fall from CHF 57,091 at normal retirement age in 2010 to approximately CHF 48,457 in 2025 – a loss of 15%. In light of this significant reduction in pensions – and the growing pension gaps – early retirement is becoming unachievable for an increasingly large proportion of the Swiss population.
Both in politics and society, better integration of older people in the labor market is increasingly being discussed. The growing lack of specialists in certain sectors can, in part, be overcome by allowing people to work beyond the age of retirement. Although early retirements are entirely possible due to closures or restructuring in the event of an acute economic crisis related to the coronavirus pandemic, long-term political, economic and societal challenges would tend to argue against early retirements.
To make the dream a reality, the importance of private savings will become even more significant
As pension benefits will probably fall further in the future, careful financial post-retirement planning is becoming more important – in particular when considering early retirement. To offset any pension gaps, measures must be examined on a case-by-case basis for the second and third pillars. An alternative to a costly early retirement is the option of taking partial retirement, i.e. gradually reducing professional activity. This avoids any sudden exit from professional life and the financial consequences are more manageable. Pension gaps that arise as a result of partial retirement or early retirement can be reduced by voluntarily purchasing additional benefits from the pension fund or by means of a bridging pension. In addition to this, it is advisable to start building up a private pension provision early on: A particularly strong compound interest effect can be obtained in light of the long-term investment horizon. Last but not least, opportunities for yield can be increased using securities.
Those planning for early retirement make above-average use of Pillar 3a
The analysis by Credit Suisse economists shows that prospective early retirees are well aware of the importance of private pension provision in this context: 67% of prospective early retirees make regular payments into Pillar 3a, compared with 58% of other workers in the same age group and 53% of the entire Swiss working population. In addition, employees who are prospective early retirees also pay higher Pillar 3a contributions on average (over three quarters of them even pay the maximum amount) and are far more likely to have several 3a accounts, thus enabling them to make staggered lump-sum payouts from Pillar 3a. Depending on the region, coordinated lump-sum withdrawals from the second and third pillars staggered over several years can result in substantial tax advantages: Through the staggered withdrawal of a total of CHF 800,000 over four years in the main cities of the cantons of Basel-Landschaft, Schwyz and Zurich, a married couple can, for example, save between CHF 32,551 and CHF 43,653.
The study "Early retirement: The path is becoming more difficult" can be found on the internet in English, German, French and Italian at: www.credit-suisse.com/retirementstudy