This article deals with the specifics of the Swiss pension system. It is not useful in its entirety to all readers but can serve as an orientation or comparison for all. In particular, the last section “Consider your pension as part of your wealth” may provide useful information to anyone wishing to integrate the effect of their state pension (usually in the form of a fixed payment at retirement) into the management of their overall wealth.
Purpose of the public pension scheme
The Swiss public pensions (1st pillar) aims to ensure the minimum subsistence and includes the disability insurance, the allowances for loss of earnings in case of service and maternity, as well as the unemployment insurance. Its main constituent is the old age and survivors’ insurance which is of particular interest to us within the framework of individual wealth management.
The AVS is a general and compulsory insurance that benefits all people who live or work in Switzerland. This old-age pension must allow the insured person to retire from working life at the planned age and guarantee a minimum material security at retirement. The occupational pension and individual savings are necessary supplements in view of the low amount of the old age pension compared to the high cost of living in Switzerland.
Two principles of solidarity make up this basic pension plan :
- Solidarity between generations: The working generations primarily finance the pensions paid out today. The system provides that today’s workers will in turn benefit from the contributions made by future generations. However, the age pyramid and the increase in life expectancy are undermining this solidarity, since the beneficiaries are living longer than anticipated when the system was set up and are becoming more numerous, placing an ever greater burden on the young and the working;
- Solidarity between rich and poor: Insured persons with a high income pay more contributions in comparison to their pension. Poorer people receive benefits that are higher in relation to what they have financed.
Financing public pensions
Businesses and workers are the main sources of revenue for the 1st pillar and part of the value added tax (VAT) and the tax on gambling houses contribute to the financing of the 1st pillar. All persons insured with the 1st pillar are required to pay their contributions, except for children and spouses who are not gainfully employed and whose contribution is at least twice the minimum contribution to the 1st pillar.
The 1st pillar follows a distribution approach. The contributions collected will convert for distribution during the same period (contrary to the process applied to the occupational pension plan, which represents a long-term saving). The annual expenses of the 1st pillar correspond to the revenues it realizes each year, with the exception of a reserve (the 1st pillar compensation fund) which is used to manage the variations in revenues resulting from short-term fluctuations in the economic situation.
The individual account is the basis for calculating the amount of each person’s pension. These pensions are adjusted for changes in wages and prices using a dedicated index that includes consumer price increases.
A limited flexibility is possible in the payment of this pension:
- either to anticipate the payment of an old-age pension by one or two years
- or postpone it by one to five years
There is also a ceiling on pensions: The sum of the two individual pensions of a married couple may not exceed 150% of the maximum pension. Above this ceiling, the individual pensions must be reduced accordingly. For married couples, this so-called “splitting” action corresponds to the division of the spouses’ income in equal parts of the income they earned during the full calendar years of marriage.
You can only calculate the retirement pension accurately at retirement age, when all the elements of the calculation are known. These are the years of contributions, the income from gainful employment and the bonuses for educational or care duties.
If the contribution period is incomplete, you will only receive a partial pension: Today, a missing year of contributions leads in principle to a reduction of the pension of at least 1/44.
Consider your retirement pension in the context of your assets
As an example, the pension today amounts to CHF 1,175 per month if the retiree has contributed continuously with a low income. The maximum pension is CHF 2,350 per month if the retiree has made uninterrupted contributions and had an average annual income of at least CHF 84,600.
If you expect to contribute all your life with a good salary, you will therefore receive a pension of 28’200 annually, if there is no change in Pillar 1 (which is unlikely). To estimate your total assets, you can consider a capital at retirement equivalent to CHF 415,000 (based on a perpetuity with an interest rate of 6.8% corresponding to the rate of the occupational pension plan), CHF 470,000 (with 6%) or CHF 540,000 (taking the predictions of the anticipated rate for the second pillar in the long term). This amount is equivalent to about 100’000 for every 10 years of contributions or a little less than CHF 200’000 for a 40-year-old man. This is of course a conceptually wrong estimation since the workers will pay this amount and does not correspond to an accumulated capital as for the second pillar and the free savings. In any case, your state pension is useful to include in your individual wealth planning as an element that will provide income in retirement in the form of an annuity.
Sources: https://www.ch.ch Versicherte sollten privat vorsorgen, 08.09.2021, Neue Zürcher Zeitung Trend der sinkenden Renten gestoppt, 27.10.2021, Neue Zürcher Zeitung