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Switzerland's pension system: The only constant is change

Although it was restricted to soldiers and civil servants about 150 years ago, today it's available to everyone: a proper retirement provision. The fight to establish Switzerland's three-pillar system was long and arduous, but in 1985 it finally became law. All's well that ends well? – No. Unless major changes are made, a new wave of old-age poverty could lie ahead. The story continues.

People around the world are living longer and longer; and Switzerland is among the countries with the highest life expectancy. Longer lives also mean a longer retirement phase. However, the length of our active working lives has not increased. What's more, current birth rates are not high enough to close the gap from baby boomers going into retirement. Simply put, the numbers don't add up.

The pension system: A history of change

There's no question that the pension system needs a major overhaul. But this is the only point on which everyone can agree. The pension system is hotly debated, and it often seems as though some are trying to defend a historic institution. However, Switzerland's three-pillar system (as we more or less know it today) has been around only since the 1980s. If you look more closely at the history of the pension system, you will see that it's a story of constant change, and the next chapter is already in progress. If we understand where our pension system came from, this may help us figure out where it's going.

The creation of the Swiss pension system

Retirement: A new stage of life

In the 19th century, people began thinking of life in three stages: training, work, and old age. It was triggered by the fact that life expectancy was rising and employment wages became common thanks to industrialization. As a result, people suddenly had leisure time in addition to working time, as well as a retirement stage after leaving the working world.

Prior thereto, life was divided into two stages, with nothing in between: training and work. The work stage usually began in childhood and lasted until old age, as long as one was physically able (however, in 1880 only about half of men aged 20 would live to be 60). This was not only true for agricultural workers in the countryside, but also city dwellers who practiced a trade.

Most workers did not experience the new life stage of retirement until the economy flourished after World War II.

"Pfrundhaus" in Zurich

Back in the Middle Ages, the wealthy could arrange for old-age care – with a benefice for example. Monasteries offered room and board to these residents. In return, they were entitled to the residents' assets. Starting already in the 14th century, cities also began offering residential options, such as the "Pfrundhaus" (frequently also referred to as "citizen's shelters") constructed in Zurich between 1840 and 1848. Zurich's Pfrundhaus at Leonhardstrasse 18 is now a municipal retirement home. 

Picture credit: Baugeschichtliches Archiv Zurich, photographer: Friedrich Ruef-Hirt, ca. 1910.

Employee benefits insurance

Pensions: Once limited to soldiers and civil servants

The first vocational groups to benefit from a state-regulated retirement pension were civil servants, officers, and soldiers. Based on the French system, pensions were introduced at the end of the 18th century.
As industrialization progressed around 1860, private companies also began to introduce group retirement and pension funds in order to care for their workers – but mainly to encourage employee loyalty. Civil servants in Basel-Stadt first got their own pension fund in 1888.

Employee benefits insurance: Long limited to select groups

Company pension funds based on the principle that is still in place today – funded by contributions from employees and employers – became more common in the first two decades of the 20th century. However, these new plans were not accessible to many workers. They were reserved for employees who earned monthly salaries and sometimes only if they had been with the company for many years. Day laborers, meanwhile, were left empty-handed. Way back in 1916, retirement savings from employee benefits insurance were made tax exempt.

The second wave of new pension funds came during the post-World War II economic boom. Still, by the end of the 1960s, only 2/3 of workers had employee benefits insurance and only 1/4 of female workers had it.

Percentage of persons aged 60+ over time 

The percentages show the share of persons aged 60+ versus the rest of the population. While only 3% of people in the Middle Ages were over 60, today about 20% are. 

Area Time  Percentage of persons 60+ 
Switzerland 750–1500 3%
City of Zurich 1637 6%
City of Bern 1764 10%
Switzerland 1860 8.5%
Switzerland 1900 9.2%
Switzerland 1941 12.9%
Switzerland 2000 20%

Höpfliger, François: Alter, in: Historisches Lexikon der Schweiz (HLS), version dated March 25, 2015. https://hls-dhs-dss.ch/de/articles/002826/2015-03-25/ (in German, French and Italian)

The path to statutory retirement provision

Preventing old-age poverty

It still took decades before Switzerland had a legally regulated model for retirement provision. Pressure was mounting, as higher life expectancy meant higher costs for care. Old-age poverty was widespread.
While some cantons (Geneva, Neuchâtel, and Vaud) created voluntary insurance plans at the end of the 19th or beginning of the 20th century, it was not until later that they became mandatory in the cantons of Glarus, Appenzell Ausserrhoden, and Basel-Stadt.

A national system sparked by WWII: The AHV

In 1925, the Swiss constitution set the stage for a statutory system, the Old Age and Survivors' Insurance (Alters- und Hinterlassenenversicherung - AHV). But initially, the federalist system stood in the way of an agreement. Due to the Second World War and the financial hardship that soldiers and their families faced, the Federal Council decided to provide income compensation to the soldiers. It was financed by withholding 2% of workers' wages. This system eventually became the AHV in 1948.

AHV in frequent transition

Since 1948, there have been ten revisions to the AHV. After the tenth revision was resolved in 1997, other reforms have been voted down by the people, if they even made it past Parliament. Most recently, the "Pension Reform 2020" program was rejected. It would have reformed the first and second pillars fundamentally and simultaneously. At the moment, Reform AHV 21 is in the works and will be decided by voters.

The three-pillar Swiss pension system

As part of the 6th revision to the AHV in 1964, the Federal Council created the three-pillar principle, and in 1972 the legal foundation was set. The first pillar is the mandatory AHV, the second pillar is the mandatory employee benefits insurance (pension fund), and the third pillar is voluntary savings with tax advantages. However, it was not until 1985 that the Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) took effect and Switzerland had its three-pillar system.

Looking to the future: The history of the pension system continues

The third life stage is getting longer

While the retirement life stage lasted just a few years when the three-pillar concept was devised in the 1960s, it's getting longer and longer these days. Better nutrition and disease prevention, along with medical advancements are to thank for improved health and longer lives. A Credit Suisse study shows that today's 70-year-olds feel just as fit as 66-year-olds did ten years ago. The difference is even greater for persons a little younger, as the chart shows below. This is in line with studies from EU countries: Older people today feel younger than their parents or grandparents.

65 is the new 51

The chronological age of 65 in Switzerland now corresponds to a biological age of 51.

Source: United Nations (UN) / Credit Suisse

The challenge of demographics

Along with rising life expectancy, other demographic changes have an influence. The baby boomers are starting to retire in large numbers – and will continue to do so for about 20 years – but the numbers of young people are far from equal.
This means that even if future reforms mean major changes, it is likely that pensions will drop further compared with today. Unless you have saved a lot of money during your working life or can accept a more modest lifestyle after retirement, you will not be able to count on a financially secure retirement.

Will we return to a two-stage lifetime?

Global trend toward working longer

In many industrialized nations, the trend is moving toward delayed retirement. However, there are big differences. In order to encourage longer working lives, countries such as the US, UK, Australia, New Zealand, and Canada have abolished a set, mandatory retirement age. The Netherlands and Denmark have tied retirement age to life expectancy, which is a controversial method.

Factors that promote longer working lives

Longer working lives are one of the most promising options for restoring the balance of the pension system in Switzerland as well. Of course, whether someone is ready, willing and able to keep working, or they are forced to do so, depends on numerous factors. Alongside personal motives, financial and social aspects play a role. Financial incentives, such as a higher pension in exchange for later retirement, are significant. But how realistic is it to keep working in our golden years? It depends largely on how well older people are integrated into the labor market, and how much appreciation they receive. In a perfect world, the pension system of the future will allow older, healthy workers to keep their jobs if they choose, while those with health problems could take earlier retirement.

Sources

Carnazzi Weber, Sara, Emilie Gachet, Jan Schüpbach et al.: Rethinking Retirement, Davos Edition 2020, Hrsg. Credit Suisse Research Institute, 2020. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/rethinking-retirement-wef-en.pdf
Degen, Bernard: Alters- und Hinterlassenenversicherung (AHV), Chapter 1: Vorgeschichte, in: Historisches Lexikon der Schweiz (HLS), version dated April 13, 2007. https://hls-dhs-dss.ch/de/articles/016611/2007-04-13/
Dubler, Anne-Marie: Altersvorsorge, Chapter 1: Mittelalter bis 1798, in: Historisches Lexikon der Schweiz (HLS), version dated August 20, 2012. https://hls-dhs-dss.ch/de/articles/025624/2012-08-20/
Höpfliger, François: Altersvorsorge, Chapter 2: 1798 bis heute, in: Historisches Lexikon der Schweiz (HLS), version dated August 20, 2012. https://hls-dhs-dss.ch/de/articles/025624/2012-08-20/
Ibid: Alter, in: Historisches Lexikon der Schweiz (HLS), version dated March 25,.2015. https://hls-dhs-dss.ch/de/articles/002826/2015-03-25/
Ibid: Pensionierung, in: Historisches Lexikon der Schweiz (HLS), version dated September 27, 2010. https://hls-dhs-dss.ch/de/articles/027287/2010-09-27/
Alfred Perrenoud: Mortalität, in Historisches Lexikon der Schweiz (HLS), version dated January 26, 2010. https://hls-dhs-dss.ch/de/articles/007976/2010-01-26/

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