– Spe­cial: Re­tire­ment pro­vi­sion

Old Age and Sur­vivors’ In­sur­ance (AHV) is Switzer­land’s prob­lem child. Even the planned re­forms are in­ad­e­quate – the coun­try should and must aim for a mas­ter stroke.

Bulletin - - Contents - Text Sara Car­nazzi We­ber and Oliver Adler

Con­cerns about re­tire­ment pro­vi­sion are grow­ing among the Swiss pop­u­la­tion. Ac­cord­ing to the Worry Barom­e­ter, around 45 per­cent of re­spon­dents list this as the most im­por­tant and ur­gent prob­lem fac­ing Switzer­land. Re­tire­ment tops the list of the Youth Barom­e­ter* for the first time as well. Grand dis­il­lu­sions are spreading, es­pe­cially among those who will only re­tire in the decades to come. And for good rea­son.

Old Age and Sur­vivors’ In­sur­ance (AHV), the first pil­lar of the Swiss sys­tem of re­tire­ment pro­vi­sion, al­ready spends more than it col­lects in con­tri­bu­tions. Ev­ery sce­nario in­di­cates that the cur­rent sys­tem will be un­able to cover the ad­di­tional fi­nanc­ing re­quired start­ing in 2020. New pro­jec­tions for AHV fi­nances through 2045 show that the deficit will even reach 220 bil­lion Swiss francs if there is no re­form. And in em­ployee ben­e­fits in­sur­ance, the sec­ond pil­lar, cur­rent ac­tive in­sured are sub­si­diz­ing the gen­er­a­tion of re­tirees to the tune of 5 bil­lion francs ev­ery year due to ex­ces­sive pen­sion prom­ises. Pen­sion funds are in­creas­ingly ex­ploit­ing any lat­i­tude open to them wher­ever their hands are not legally tied. Con­ver­sion rates are fall­ing for ex­tra-manda­tory cov­er­age. Fu­ture pen­sion re­cip­i­ents must there­fore ex­pect to re­ceive lower re­tire­ment ben­e­fits from the cap­i­tal they have saved. It is not sur­pris­ing that the third pil­lar – where there is no cross-fund­ing – has the high­est rate of sat­is­fac­tion of the three 2.

Fig­ure S. The un­der­ly­ing prob­lem of re­tire­ment pro­vi­sion is a sim­ple one and has been no se­cret for quite some time. We are liv­ing longer and longer and in bet­ter

* Link: credit- suisse. com/ youth­barom­e­ter

health. How­ever, the years spent in ac­tive em­ploy­ment – the time when money is saved for re­tire­ment – have re­mained the same or even short­ened. Longer pe­ri­ods spent in train­ing and ed­u­ca­tion mean peo­ple are en­ter­ing the work­force later, and early re­tire­ment means they are leav­ing it sooner. While there were more than six ac­tive in­sured for each pen­sion re­cip­i­ent when the AHV sys­tem was in­tro­duced in 1948, to­day there are only about three, and there may only be two in 2045.

Af­ter the fail­ure of the 2020 pen­sion re­form pack­age last year, the Fed­eral Coun­cil got right to work on de­vel­op­ing a new bill. Mea­sures to shore up AHV in­clude plans to in­crease the re­tire­ment age of women to 65 and to raise VAT and pay­roll con­tri­bu­tions. In ad­di­tion, the first pil­lar will re­ceive added an­nual in­come of two bil­lion Swiss francs to com­pen­sate for lower cor­po­rate taxes un­der the planned tax bill. Such mea­sures would pro­vide AHV with a brief re­prieve, though they will not se­cure fund­ing in the long term. The short­fall by 2045 will still reach 55 bil­lion Swiss francs. Equally im­por­tant, the re­form of em­ployee ben­e­fits in­sur­ance has been put off un­til later.

It could be ar­gued that the fund­ing gap is not that big af­ter all. How­ever, con­sid­er­ing the fore­casted deficit of 220 bil­lion Swiss francs with­out re­form, the av­er­age an­nual com­mit­ment to AHV by 2045 would be dou­ble the Con­fed­er­a­tion’s an­nual ex­pen­di­tures for ed­u­ca­tion. These re­sources are not avail­able for other ser­vices that pro­mote Switzer­land’s pros­per­ity, and fu­ture gen­er­a­tions will be the ones to foot the bill.

What is needed is a PREDESTINED FOR GREAT THINGS mas­ter stroke in terms of pen­sion pol­icy, vi­sion­ary de­ci­sions that re­flect not only the ag­ing de­mo­graphic by grad­u­ally in­creas­ing the re­tire­ment age, but also changes in how peo­ple live. The bound­aries be­tween the in­di­vid­ual stages of life are blur­ring more and more. So are the lines be­tween ed­u­ca­tion and gain­ful em­ploy­ment – thanks to longer study pro­grams and life­long learn­ing – and those be­tween work and re­tire­ment, as a re­sult of flex­i­ble re­tire­ment op­tions. New forms of work are be­com­ing more com­mon, in­creas­ingly test­ing the vi­a­bil­ity of the sys­tem, par­tic­u­larly in em­ployee ben­e­fits in­sur­ance. Fur­ther­more, the tra­di­tional divi­sion of roles be­tween men and women no longer rep­re­sents the pre­dom­i­nant so­cial model. When asked 1, vot­ers rec­og­nize that

Fig­ure S. “ev­ery­one has to do their part” to achieve pen­sion re­form; they value the three-pil­lar model and ap­pear open to dif­fer­ent solutions. As a coun­try with one of the high­est life ex­pectan­cies in the world as well as a strong ser­vice sec­tor and only a small per­cent­age of the work­force sub­ject to hard, phys­i­cal work, Switzer­land would seem predestined for a ma­jor po­lit­i­cal mas­ter stroke. How­ever, the fact is that, in an OECD com­par­i­son, Switzer­land is among those coun­tries with the low­est re­tire­ment ages and cor­re­spond­ingly the long­est pe­ri­ods in which re­tire­ment ben­e­fits are paid out. The planned re­form will not change this very much.

Sara Car­nazzi We­ber is Head of Swiss Sec­tor and Re­gional Anal­y­sis, and Oliver Adler is Chief Economist Switzer­land at Credit Suisse. Fur­ther Stud­ies “Swiss Fi­nan­cial Cen­ter 2018: from cri­sis to growth” May 2018 • “Oc­cu­pa­tional pen­sions: Lump sum or an­nu­ity?” 2018 • “Pri­vate re­tire­ment pro­vi­sion: 3a sav­ing in Switzer­land” 2018 Down­load at: credit- suisse. com/ pub­li­ca­tions Mar­kets & trends Swiss econ­omy

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