The future of pensions The pension system needs reform

While life expectancy in Switzerland has been increasing over the last 40 years, the birth rate has been so low that, without immigration, the population is expected to shrink by a third with each generation. This situation demands new and far-reaching ideas for the three pillars of our pension system, which was introduced under very different demographic conditions than those today. As an economist and pensions expert, I was invited to join a panel of fellow experts at the UBS Center for Economics in Society to discuss ways to safeguard the pension system.

Professor Monika Bütler, Jérôme Cosandey and I – guided by Professor Florian Scheuer – were divided on several topics. However, we did agree that the retirement age for the state pension (AHV) needs to be harmonized for demographic reasons. The retirement age should also be increased for all genders, ideally by linking it to average life expectancy.

As Jérôme Cosandey, Director at Avenir Suisse for French-speaking Switzerland, stated: “Raising the age of retirement by one year would save approximately CHF 3 billion every year.” The question remains as to how we can help bring about the political breakthrough needed to make this a reality.

Swiss citizens enjoy some of the longest retirements in the world. As I stated during the debate: "Today we only work 1.8 years for every year of pension received compared to 3.4 years when the AHV was launched in 1948. That’s almost twice as long." This is because someone retiring today will receive a pension for an average of 24 years compared with only 13 years in 1948.

The panel also agreed that because the physical stresses of working life are not the same for all occupations, individual models would be appropriate in different industries. However, industry-specific solutions would need to be cost-neutral for the general population because industries, and therefore private companies, profit from the physical labor of their employees. This is the only way that companies can be encouraged to further improve working conditions.

In addition to the question of how to finance pensions, I believe that the situation with mothers and fathers as their children’s primary caregivers is also a challenge. The contributions they make while bringing up children only help the state, because it will be the children who finance the AHV, health service and general state spending in future. With state-financed childcare, mothers would contribute to the state due to higher income taxes and the taxes paid by their children, while being able to secure their retirement provision in pillars 2 and 3.

During the discussion the idea also came up of abolishing the uniform pension age completely, but an in-depth discussion would have gone beyond the scope of the podium. Economist Monika Bütler concluded our discussion of the topic with the following summary: “A fixed retirement age has a tremendous anchoring effect and is actually more important than the financing model.” A retirement age recognized by the whole of society would provide guidance to both employers and employees. Everyone would know how long they would normally need to work.

Pillar 2: Would a choice of pension fund allow for personalized solutions?

Recorded interviews with three politicians representing the respective parties Die Mitte (The Center), GLP (Green Liberals) and FDP (Liberal Democrats), formed the basis for each round of discussion. However, what is controversial for politicians is not necessarily controversial for experts like us. For example, we believe that lowering the conversion rate in pillar 2 is a necessary next step. Whereas we are very interested in the question of whether employees should be able to choose their pension fund in future, for politicians this question is entirely hypothetical.

Although the option to choose would neither help nor hinder the issue of financing, Jérôme Cosandey argued that many people no longer see why only company executives get to choose the pension fund, given that most of the fortune of an employee is managed by the funds.

Monika Bütler was skeptical about offering a choice of mandatory pension scheme: “I can choose my health insurance provider and even if choose the wrong one, I haven’t lost anything. But if after five years I notice that my pension fund made a mistake, I’ll have a serious problem on my hands.”

For me, a choice of fund would open up a lot of opportunities. With its centralized decision-making, the current system has failed to meet the needs of several generations. In my view, this relativizes the risk of leaving the decision to individuals. To meet the challenges of the current system while boosting competition between providers, we should separate the contribution and benefit phases. Many countries that offer a choice of pension fund do this. Employees could then choose a provider that suits them in both phases. A separate solution for the benefit phase would also allow those with a lower life expectancy to receive a higher annual pension.

The current system leads to unfair outcomes because those with a lower life expectancy – for health reasons or because they performed more physically demanding work – subsidize the better-off, who generally live longer.

According to Jérôme Cosandey, the risk of individuals being overwhelmed by the choice of pension fund is minimal: “The current system is only as complex as it is because it is a B2B business. A free market would massively reduce the level of complexity.” Cosandey continued by saying that we already regularly make decisions with a major financial impact, such as having children, getting married (or divorced) or buying a home. This is a line of argument that I agree with: If you have to take responsibility for making a decision, you will need to spend more time looking into your finances. I notice that not many of my friends and family members are interested in retirement planning. There is still a widespread belief that the state will solve the problem. But that has not been true for a long time.

Pillar 3: retroactive payments overdue

The central questions that arose in our discussion of pillar 3 were how much each person should save independently, and whether there are situations in which someone cannot save enough. I answered the last question by saying: “Couples with children are guaranteed to go through periods where they cannot deposit the maximum amount into pillar 3a. I consider the recently approved Ettlin motion, which will make additional contributions possible, a step in the right direction.” Another option would be to allow children to save in pillar 3, with tax breaks for the parents and the opportunity to use the money for their education. If parents explain this option to their children and they benefit from it during their education, people will get into the habit of taking financial responsibility at a younger age than they do now.

Monika Bütler argued that pillar 3 should be made more attractive for sole proprietors: “Pillar 3 is hugely important for the self-employed, because they do not have a pension fund.”

The discussion confirmed my view that the pension system needs to be reformed. We are going to have to make some difficult decisions soon, both as a society and, in plebiscites, as individuals. A higher retirement age and a lower statutory conversion rate are just two examples. If we don’t act soon, there is a risk of long-term damage to our fundamentally sound pension system. Preventing this from happening is both a shared responsibility and a huge opportunity.