The Swiss pension system has three pillars, which allows a certain solidarity and individual flexibility. However, the selfishness of each generation and the radicalism of the positions today puts it in great danger. This situation is similar in many countries in Europe and America. Thus, readers / do-it-yourself investors from nearly all jurisdictions will benefit from the positioning envisaged at the end of the article, with at most a quick overview of the central part more specific to Swiss readers.
The three pillars
There are different features and financing methods for the three pillars, which contributes to the robustness of the overall structure: pay-as-you-go system for the Pillar 1, funded system for the Pillar 2; the financing of the third pillar is free and individual, partly taxed optimized:
- The first pillar (AHV) is financed jointly by all persons, employed and self-employed.
- In the second pillar (BVG), employed persons – together with the employer – save in principle for themselves. At most, there is solidarity within a fund; for example, from single to married persons.
- In the third pillar, anyone can save a limited annual amount.
The problem of pensions
In the sensitive subject of money and pensions, certain parameters should be depoliticized. The level of the interest rate is not a political parameter, even if less independent central banks, such as the ECB, bend to the demands of politics. Moreover, politicians do not define or influence life expectancy, although it has a crucial impact on the amount of pensions.
For example, many other OECD countries have long since raised the retirement age, even though the populations of some of them have a lower average life expectancy than the Swiss. If we compare the Swiss pension system with those of rather close countries like the Netherlands, Sweden and Denmark, these countries have all linked the retirement age to life expectancy. However, the value for money is often not as good as in the best pension funds in Switzerland. This is partly because the Swiss large funds are relatively efficient and charge low administrative costs per user.
Reforms under discussion
In the context of the rescue of the pension system, experts and politicians have put forward various pragmatic options:
- Contributing earlier to pension funds: With the advancement of retirement savings to the age of 20, young professionals would be able to build up their pension provision (four years) earlier.
- Lowering the employer’s contribution rate for older workers: One proposal is to adjust the 14% contribution rate for those over 45. This idea makes sense because it could make it easier for older people to find jobs. The current rate for those over 55 is 18%, which hinders the employability of older people.
- Limiting the payment of pension assets: With the exception of home ownership, the lump-sum payment of second pillar pension assets should only be possible if other means secure minimum retirement provision.
While the active generation finances the pensioners in the pillar 1, in principle everyone saves for himself or herself in the occupational pension scheme. However, there are multiple solidarity mechanisms in the second pillar – between young and old, single and married, healthy and disabled: the consequence is that no insured person receives exactly what he or she has paid into the pension fund. It is commendable that this system covers the financial consequences of death and disability or that the insured jointly bear the risk of a poor performance of the pension fund, for example due to a stock market crash. The fact that women benefit from the same conversion rate as men at the time of their retirement, even though they benefit on average three years longer than men due to their higher life expectancy, does not seem to be a concern either.
Deadlocked pension reforms
The central and indisputable problem is the massive redistribution from the active insured to the pensioners, which is increasingly destabilizing the system, while the pensioners have often benefited from a higher interest rate over the last decades and then enjoy a lifetime interest guarantee when they retire.
At present, each party is pushing for a financing method that suits its interests, which blocks any solution. The left, for example, wants to extend the solidarity principle of the first pillar (AHV) to the second pillar (with a proposal for a 0.3 per cent charge increase in the salary of all working people) in order to mitigate the likely future loss of pensions. This is by no means a solution, since it is a new redistribution from the young to the old, whereas there are other options for mitigating the pension losses that could occur if the conversion rate decreases (from 6.8 to 6 per cent) as it is under discussion today. Opinions will also differ, depending on their political leanings, on the increased redistribution, foreseen in the reform, from insured persons with higher salaries to those with lower incomes. This is already the case with the first pillar and the philosophy of the occupational pension plan did not foresee this. In addition, salaries below CHF 86’040, which are compulsorily insured, already benefit from a politically fixed minimum BVG conversion rate of 6.8%, which is too high in light of the increased life expectancy. Salaries above this amount, and therefore many members of the middle class, benefit from a lower conversion rate.
Without solidarity, the occupational pension system in Switzerland would not work. However, if there is too much, the system becomes unwieldy and uncontrollable. Imbalances must be corrected so as not to jeopardize the credibility of the occupational pension system and thus also the Swiss three-pillar system as a whole. Even if some reforms are successful, it is preferable to reduce exposure to the pension system. An immediate possibility is to partially reduce this capital in order to buy a house for example or by considering the approach below.
Measures for the do-it-yourself investor
Currently, the pension fund is the main asset of most people in Switzerland. Ultra-low interest rates and demographic trends – combined with the lack of political reforms – have put these assets in a precarious position in recent years. The inability to maintain scheduled payments and meet obligations will likely lead to the creation of inflation in order to reduce, if not clean up, past pension debts.
If you are an active worker and are rightly concerned about the declining attractiveness of your occupational pension plan and of your retirement system as a whole, it is possible to reduce it (by contributing less or by making withdrawals under certain conditions). This will allow you to adopt a more individual approach to retirement planning (even if, unfortunately, tax optimization is less straightforward). The first pillar leaves little room for maneuver, but we recommend that you make the maximum deductions in your free pension plan (third pillar). In addition to the three official options (three pillars), it is advisable to compensate for the shortcomings of the system with an individual savings plan as recommended on this site: Limited but regular long-term investments through diversified vehicles (ETFs issued by Vanguard and iShares for example). This participation in the stock market, even if risky, will allow to partially counteract the evils of inflation if it materializes, as it is the scenario that seems the most probable to us. We could envisage another scenario, much more optimistic, with an economic nirvana and a prosperity for all made possible by robots and Artificial Intelligence as advocated by some serious minds: This would allow a universal income paid by the State (as it is currently the case for the citizens of Qatar who live in abundance of natural resources) and solve the pension system. This evolution is not impossible but its probability is much lower than a weakening of the pension system coupled with inflation, which is our expected scenario. It is best not to rely on a magical resolution of these financial impasses and to build a diversified portfolio of corporate stocks over time.
Sources: www.ch.ch Versicherte sollten privat vorsorgen, 08.09.2021, Neue Zürcher Zeitung Trend der sinkenden Renten gestoppt, 27.10.2021, Neue Zürcher Zeitung