Old Age and Survivors' Insurance (AHV) is Switzerland's problem child. Even the planned reforms are inadequate – the country should and must aim for a master stroke.
Concerns about retirement provision are growing among the Swiss population. According to the Worry Barometer, around 45 percent of respondents list this as the most important and urgent problem facing Switzerland. Retirement tops the list of the Youth Barometer for the first time as well. Grand disillusions are spreading, especially among those who will only retire in the decades to come. And for good reason.
Old Age and Survivors' Insurance (AHV), the first pillar of the Swiss system of retirement provision, already spends more than it collects in contributions. Every scenario indicates that the current system will be unable to cover the additional financing required starting in 2020. New projections for AHV finances through 2045 show that the deficit will even reach 220 billion Swiss francs if there is no reform. And in employee benefits insurance, the second pillar, current active insured are subsidizing the generation of retirees to the tune of 5 billion francs every year due to excessive pension promises. Pension funds are increasingly exploiting any latitude open to them wherever their hands are not legally tied. Conversion rates are falling for extra-mandatory coverage. Future pension recipients must therefore expect to receive lower retirement benefits from the capital they have saved. It is not surprising that the third pillar – where there is no cross-funding – has the highest rate of satisfaction of the three.
The underlying problem of retirement provision is a simple one and has been no secret for quite some time. We are living longer and longer and in better health. However, the years spent in active employment – the time when money is saved for retirement – have remained the same or even shortened. Longer periods spent in training and education mean people are entering the workforce later, and early retirement means they are leaving it sooner. While there were more than six active insured for each pension recipient when the AHV system was introduced in 1948, today there are only about three, and there may only be two in 2045.
After the failure of the 2020 pension reform package last year, the Federal Council got right to work on developing a new bill. Measures to shore up AHV include plans to increase the retirement age of women to 65 and to raise VAT and payroll contributions. In addition, the first pillar will receive added annual income of two billion Swiss francs to compensate for lower corporate taxes under the planned tax bill. Such measures would provide AHV with a brief reprieve, though they will not secure funding in the long term. The shortfall by 2045 will still reach 55 billion Swiss francs. Equally important, the reform of employee benefits insurance has been put off until later.
It could be argued that the funding gap is not that big after all. However, considering the forecasted deficit of 220 billion Swiss francs without reform, the average annual commitment to AHV by 2045 would be double the Confederation's annual expenditures for education. These resources are not available for other services that promote Switzerland's prosperity, and future generations will be the ones to foot the bill.
consider retirement provision as Switzerland's biggest problem.
Predestined for great things
What is needed is a master stroke in terms of pension policy, visionary decisions that reflect not only the aging demographic by gradually increasing the retirement age, but also changes in how people live. The boundaries between the individual stages of life are blurring more and more. So are the lines between education and gainful employment – thanks to longer study programs and lifelong learning – and those between work and retirement, as a result of flexible retirement options. New forms of work are becoming more common, increasingly testing the viability of the system, particularly in employee benefits insurance. Furthermore, the traditional division of roles between men and women no longer represents the predominant social model.
When asked, voters recognize that "everyone has to do their part" to achieve pension reform; they value the three-pillar model and appear open to different solutions. As a country with one of the highest life expectancies in the world as well as a strong service sector and only a small percentage of the workforce subject to hard, physical work, Switzerland would seem predestined for a major political master stroke. However, the fact is that, in an OECD comparison, Switzerland is among those countries with the lowest retirement ages and correspondingly the longest periods in which retirement benefits are paid out. The planned reform will not change this very much.