Time to rethink retirement
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Time to rethink retirement

Voter priorities are clear and their impatience is mounting: They want answers and results.

Concerns about retirement provision are growing among the Swiss population. According to the latest Credit Suisse Worry Barometer, around 37 percent of respondents cite this as the most pressing problem in Switzerland. If it weren't for the coronavirus pandemic, pensions would have once again topped the list of biggest concerns this year. And for good reason.

Threat of reductions in benefits

The AHV, the first pillar of the Swiss retirement system, already pays out more than it takes in, and the financing situation will erode further with the wave of retiring baby boomers that is already under way. Over the next decade, some 1.1 million people will reach retirement age. In employee benefits insurance, the second pillar, the active insured are subsidizing the generation of retirees to the tune of five to seven billion Swiss francs every year due to excessive pension promises. Pension funds are increasingly exploiting the latitude available to them wherever their hands are not legally tied – in the extra-mandatory area – and reducing retirement benefits. If no measures are taken, the pension situation will worsen substantially for future generations. We estimate that the replacement rate – the pension payments from the first and second pillar plans in relation to an individual's final salary – for people in the middle income segment will fall from around 57 percent (2010) to around 45 percent (2025).

Only a little bit of breathing room achieved

Thanks to the Tax Reform and AHV Financing (TRAF) that commenced this year, there is now an additional two billion Swiss francs in funding for the AHV each year. However, this measure provides the AHV with only a little bit of breathing room. Following the failure of the 2020 pension reform package in 2017, the Federal Council is attempting to push through a new proposal known as "AHV 21." The key measures in the proposal are a harmonization of the retirement age at 65 for both women and men and an increase in value added tax. A draft consultation for the second pillar based on a joint proposal offered by the various social partners has also been submitted for consideration. There have been some steps in the right direction, although they have been somewhat tentative, such as an overdue reduction of the minimum conversion rate from 6.8 to 6 percent and lowering the coordination deduction to better integrate employees whose level of employment is low.

The key parameter – the retirement age – has been left untouched. The retirement system does not take account of demographic changes, which will lead to increasing disparities between generations. Grand disillusions are spreading, especially among those who will only retire in the decades to come. In the Credit Suisse Youth Barometer, retirement provision tops the list of key issues in Switzerland, ahead of the coronavirus pandemic. And a majority of young people believe the pandemic makes reforming pensions even more urgent.

It is time to think big when it comes to retirement provision policy, time for forward-looking decisions that take account not only of demographic aging, but also of changes in how people live. The boundaries between the individual life stages are blurring more and more. So are the divisions between education and gainful employment – thanks to longer study programs and lifelong learning – and the lines between gainful employment and retirement, as a result of flexible retirement options and new forms of work. The division of life into the three phases of education, employment and retirement is no longer as rigid as it once was. Nor is it a fixed part of every individual's nature.

New life stages

Retirement as a stage of life didn't appear until the 19th century with early forms of state retirement provision. The observable changes in the way we learn and work have created space for additional life stages that must be taken into account when organizing pension systems. In order to defuse the demographic time bomb and unlock the longevity dividend, we need to rethink retirement.