Retirement Provision – What Awaits Us?
The baby boomer generation is retiring, and all of us are expected to live longer than our parents. These factors are a challenge for both state pension provision and employee benefits insurance. Now that voters have rejected the "Pensions 2020" reform package, the Federal Council is putting together a new package. What impact will this have on today's employees? Credit Suisse pension experts Rocco Baldinger and Markus Stierli give their assessment.
The "Pensions 2020" reform package failed to pass the vote last fall – what do you think the main reasons for this were?
Rocco Baldinger: I believe there were three key reasons for this: First, the bar was set too high – it was too much for the bill to reform the Old Age and Survivors' Insurance (AHV) and the Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) at the same time. Second, the government misjudged voters: The AHV reform included an incentive of 70 Swiss francs that would have been distributed based on the principle of equal shares for all. At the same time, everyone knew that we need to save money with AHV, which is a major contradiction. Third, the cost of the reform was to be carried by young people and women since it would have raised the retirement age, increased value added tax, and created larger payroll deductions.
Federal Councillor Alain Berset has now announced a new proposal meant to take effect as early as 2021. It will initially concern just AHV, which is meant to be stabilized in part through a 1.7% increase in value added tax. What's your take on it?
Markus Stierli: The focus on AHV makes sense. The bill is centered on fewer elements, and there is more societal consensus on the first pillar, which means it is more realistic that it will pass. AHV reform is also more urgent. It is meant to be offset by valued added tax – a tax that is collected on consumption and is considered to be fair, which is more practicable in terms of politics. At the same time, you have to wonder how sustainable this idea is. At some point, increasing the value added tax further every couple of years is likely to no longer be accepted.
Baldinger: I agree. Although the use of value added tax to secure AHV may actually be widely accepted, it is unfortunately not a sustainable solution for reforming the Swiss pension landscape. Pension reform needs to be far more comprehensive. The longer we wait, the more painful the cuts will be.
Do you see any alternative pension reform solutions that are widely acceptable?
Stierli: No, I still can't think of anything more widely acceptable. There are many ideas, such as the one that proposes making retirement dependent on the type of work. Based on this, a bricklayer – who performs hard, physical labor – would retire earlier than a bank worker. However, I believe that generally raising the retirement age will still be inevitable over the long term.
The top concern on Credit Suisse's Worry Barometer is AHV along with youth unemployment. Personal responsibility in retirement plays a substantial role.
The Federal Council wants to raise the retirement age for women to 65 in the current reform. Will that work?
Stierli: So far, this increase has consistently been a major reason for its rejection. But it is a good idea to talk about the retirement age – for men as well as women.
Baldinger: The retirement age should be structured more flexibly in the new reform. One thing that many Swiss people are always eager to overlook when it comes to their pensions is the fact that life expectancy is very high in Switzerland, as is prosperity. And yet we are sticking to a retirement age of 64/65 while most European countries are aiming for a retirement age of 67.
The first pillar is the Federal Council's top priority. A proposal from the social partners has been requested for the second pillar reform. What development do you expect in this area?
Baldinger: For the second pillar, we will need to have an in-depth discussion of the assured pension stipulated by law, the minimum conversion rate, and the technical interest rate. People are increasingly living longer and the capital markets are yielding less interest – so we are unlikely to be able to avoid discussing reductions to benefits as well. This will place more of a spotlight on the third pillar.
That is discouraging for those insured. They pay just as much, work longer, and receive less.
Stierli: But we are also living longer.
Baldinger: Despite everything, we have one of the best secured pensions systems in the world. There are many benefits in our three-pillar system – which consists of a state pillar, a professional pillar, and a private pillar. For a start, tax breaks are used to appeal to the personal responsibility of account holders. Pension gaps occurring in the second pillar can be closed, all while still limiting taxes. The third pillar unfortunately has no option for making catch-up contributions – I think this is where lawmakers would need to take corrective action with a view to a stable pension system. After all, gaps can also arise in private pensions during your career. This could be due to low income, the initial phase of self-employment, parental leave, or long periods abroad.
What age would you advise someone to start looking into their retirement provision?
Baldinger: Once they receive their first gainful employment income.
Is that realistic? Are very young people really interested in their retirement provision?
Baldinger: They should be! Interest generally picks up when they are around 25 to 30 years old. And the top concern on Credit Suisse's Worry Barometer is AHV along with youth unemployment. Personal responsibility in retirement plays a substantial role. So it is crucial to look into your personal pension status early on.
Stierli: This topic poses some uncertainty. Young people are not really capable of assessing what their circumstances will be – in part because many of them know hardly anything about our three-pillar system. Very few of them know how to correctly interpret their pension fund statement. I think that schools need to provide some clarity and that they have some socio-political responsibility here. Government institutions, insurance companies, and we as a bank also need to see this responsibility.
What steps would you recommend for someone who has never looked into their retirement provision?
Stierli: They could get some advice, particularly from a bank. Many people only see their range of products, but the bank is not limited to the third pillar. That's just one of the means that is used to save up for retirement. So we always develop pension strategies based on a comprehensive perspective and we see ourselves as experts in the entire field of pension provision.
Baldinger: I sometimes hear people insist it is better to go to an "independent pension advisor." For us as a bank, retirement planning is much more than a one-time event, though. Quite the contrary. As a bank, we are interested in working with our clients to increase their wealth and to optimally plan their asset depletion during the period that they draw from their pension. So the earlier our clients look into their personal pension status, the more flexible the planning is for accumulating wealth and the less problematic it is for them to go into retirement.
Stierli: But perhaps the best advice on this matter is that anything is better than doing nothing: requesting a personal account statement from AHV, obtaining pension fund advice, consulting with your bank advisor. What is important is to take your retirement provision into your own hands and take that first step to get started.