Demographic Change Is Causing Issues for Retirement Pensions

Demographic Change Is Causing Issues for Retirement Pensions

Today, too many retirees need to be financed by too few actively employed workers. This means that the intergenerational contract and retirement provision must be adjusted to suit the conditions of modern society.

Together with employers, the actively employed finance the retirement provision with the AHV and pension funds. Both of these pillars are mandatory. These days, those who would like to maintain their accustomed standard of living must also make use of private options for pension provision. The third pillar, individual savings for old age, is tax-privileged but voluntary. These three pillars have made it possible to largely eliminate poverty in old age in Switzerland. However, this carefully configured pension system is gradually reaching its limits.

Demographic Framework Conditions Are Changing

During the post-war boom era, the retirement provision was almost able to finance itself. There was enough work and enough next-generation talent. Wages rose annually, such that the mandatory contributions rarely came under pressure. Today, the demographic framework conditions have changed dramatically: Roughly half of the people in Switzerland are more than 50 years old. In addition, we are living significantly longer. According to information from the Swiss Federal Statistical Office, the average life expectancy has developed as follows: For women, this was 79.2 years in 1981, and 84.9 years in 2015. For men, it climbed from 72.4 to 80.7 years in the same period. In addition, today's families only have one or two children, instead of four or five.

Infographic – Children per family

The Ratio Has Changed Enormously

Longer life expectancies and a decline in the birthrate have led to an enormous change in the ratio of pension recipients to actively employed workers. In 2040, it is expected to reach one to two. By comparison: At the end of the 19th century, this ratio stood at one to ten. However, there is no reason to panic.

Thanks to technological progress, our economy has become much more productive. Medical advancement has ensured that more and more people in Switzerland can enjoy good health into old age. This means that today's actively employed workforce can work more and for a longer amount of time, and often want to. These are good conditions for overcoming the challenges of the future.

Infographic – Life expectancy in Switzerland

Adjustments Are Inevitable

What are these challenges? First and foremost, it is necessary to ensure that the burden for young workers does not become disproportionately large. For this reason, increasing the flexibility of the retirement age is a central priority. Without rigid age limits, the workforce can remain actively employed for longer, and thus contribute towards reducing the high costs of retirement provision. Services must also be brought into line with the changing framework conditions. In today's low interest rate environment, it is no longer possible for pension funds to achieve the dream-like annual yields of the past. Nevertheless, this means that adjustments are unavoidable in order to ensure fairness and the social acceptance of the intergenerational contract.

By 2040, the ratio of pension recipients to active workers will fall to one to two. 

Also unresolved is the problem of how the growing, cost-intensive need for care of an increasingly aging society can be covered. It is becoming increasingly difficult to recruit well-trained caretaking staff due to a looming shortage of skilled personnel. The area of volunteer work is also changing, and will play an increasingly important role in providing support for those in need of care. 

Stabilization of AHV by 2021

Following the rejection of the 2020 Pension Reform package by voters, the Federal Council has responded by referring two alternatives to stabilize the state pension system (AHV) by 2021 to parliament for consultation. These include possible adjustments to the reference age and value-added tax. The broad consensus is, however, that the days of retirement provision seemingly financing itself are over. Instead, there is growing awareness that we can no longer rely solely on the state if we want to enjoy a carefree retirement and act fairly to future generations. Personal responsibility is becoming increasingly important.