How Important Is the Second Pillar to Your Financial Situation in Later Years?
An analysis by Credit Suisse economists shows that the proportion of the Swiss population covered by employee benefits insurance has risen from generation to generation. Even so, only for the higher-income brackets – including for the younger generation of retirees – is the second pillar a key component of income.
The pension fund study recently published by Credit Suisse includes an examination of how important the second pillar is to the financial situation of the Swiss population in later years. The extent to which pension-fund pensions contribute to the income of retiree households is heavily dependent on the year in which retirees were born. Mandatory employee benefits insurance was not introduced until 1985, when the Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) entered into force. Consequently, older generations often had no opportunity to build up a full pension. Even the people currently reaching the statutory retirement age of 65 were already over 30 years old when they began paying into the mandatory second pillar. For these generations, a short contribution period and even missing contributions are squeezing the retirement benefits they receive on top of the first pillar (AHV).
Second Pillar Coverage Has Improved over Time
Employee benefits insurance coverage has improved in recent decades, as expected. For the oldest generation of retirees (80 years or over), pension-fund pensions average around 31% of gross income. The figure increases to 37% in the case of younger retirees (aged between 65 and 75). The proportion of pensioners solely receiving an AHV pension has also declined, from 36% among the oldest to 20% among the younger generation.
Coverage Primarily Depends on Income Level
Even so, it is income level rather than the year in which the insured were born that determines the importance of the individual pillars to financial security in retirement. Only in the higher-income categories do pensions from employee benefits insurance make a key contribution to the income of retiree households, with an average share of 43%. The figure is just 9% in the lowest income quintile (in other words the 20% poorest retiree households). Expressed in absolute figures, that corresponds to an average pension-fund pension of just CHF 230 or so out of a gross income of CHF 2,600 per month (see graph). The lowest-income pension recipients receive the lion's share of their income from the AHV scheme (around CHF 2,080). This finding applies across all generations: Although second-pillar coverage has continued to increase in recent decades, even some of the younger retirees have very limited access to employee benefits insurance, or only receive limited benefits from it.
Differences in Employee Benefits Provision Likely to Remain Significant
The coverage afforded by the individual pillars of retirement provision should continue to improve in the future. On average, only 5% or so of today's working population contribute solely to the first pillar (see figure). Even so, the differences between sections of the population are likely to remain significant: Nearly a quarter of working households in the lowest income bracket solely pay AHV contributions, with just 12% paying into all three pillars. Even in the middle-income range, only half of those in employment contribute to all three pillars. Social changes such as the increasing proliferation of part-time employment also risk accentuating the differences between income categories in terms of retirement provision. Due to the minimum income required for enrolment in an employee benefits plan and the coordination deduction, individuals who work a limited number of hours and are paid low wages are disadvantaged by the current system and at risk of being unable to save enough for retirement (see section on part-time work).
Private Provision Becoming More Important
In this context it is all the more important for those on low incomes in particular to start building up a private pension (third pillar), on top of the first and second pillars, if they are to secure a reasonable standard of living in retirement. Even paying in small amounts can be worthwhile. That is especially the case given that demographic aging is putting increasing pressure on the first two pillars of the pension system.