From young to old, from rich to poor: how fair is our pension system?

Today’s working people use their contributions to fund the pensions of those who are now retired, which is what the pay-as-you-go system of financing wants. There is also a major redistribution from rich to poor. Anyone who earns a million francs pays AHV premiums on their entire salary. However, the pension is limited: the maximum pension is ‘only’ twice as high as the minimum pension. This is politically desirable in a social insurance system based on solidarity (see infographic). According to a calculation by pension expert Andreas Zeller, 88 percent of retirees receive more pension than they have financed themselves (directly through premiums and indirectly through taxes).

Who benefits from this except the poor?

Widowers and parents: they receive supplements to their old-age pension, which are paid by the general public. Widowers because they receive a 20 percent supplement when calculating their old-age pension. And mothers and fathers because they receive childcare allowance until the youngest child is 16 years old. These are fictitious AHV contributions that are credited to the parents’ AHV account – half to the mother and half to the father – regardless of whether they work less because of the children. In total, women pay 34 percent of the AHV premiums, but receive 55 percent of the benefits (because they live longer and receive widowhood benefits more often).

Is redistribution in the AHV increasing?

In all probability. First, unlike before, 20 percent of the AHV is now financed through federal subsidies, that is, through taxes. Due to its strong progression, the direct federal tax is a tax on the rich: the highest income per thousand (with a taxable income of more than one million francs) pays about 40 percent of the federal tax. And second, the number of top earners is certainly higher today than when the AHV was introduced, so they also contribute more.

Does a 13th AHV pension increase the redistribution?

In each case. A 13th AHV pension costs billions, this money has to come from somewhere, the initiative text leaves this question open.

There are three obvious options:

1. About higher wage deductions,
2. About an increase in VAT
3. About a combination of these

Variant 1 increases the redistribution from those currently working to retirees, while variant 2 also places the greatest burden on retirees and people on low incomes: they spend a much larger share of their income on consumer goods, and higher VAT hits them harder than rich people.

What role do additional services play in this?

Supplementary benefits (EL) are social assistance for retirees if the pensions from AHV and pension fund are not sufficient to live on. ELs are financed entirely from the public purse, i.e. from taxes. That is why there is a redistribution from the “rich” taxpayers to the “poor” EL recipients. About 10 percent of 65-year-old AHV retirees need EL. In other words, 90 percent of retirees can get by without EL at least initially, but they would all receive a 13th AHV pension regardless of whether they are financially dependent on it or not.

How long do you have to work to finance your 13th AHV pension?

If all AHV recipients now receive 13 monthly pensions instead of the previous 12, this corresponds to an increase of 8.3 percent. In 2026 this will cost just over 4 billion francs, and in 2030 (due to the increasing number of pensioners) around 5 billion francs. To finance this, the retirement age would have to be increased roughly by two years, namely to 67 for women and men. However, from 2030 onwards there will be a gap in the AHV bill, even without a pension increase. According to federal calculations, fixing this problem would require a 3.4 percentage point increase in the sales tax or a 2.6 percentage point increase in payroll deductions – or an increase in the retirement age by three to four years.

What does a higher retirement age entail compared to higher premiums or taxes? Which lever has the most effect?

A higher retirement age has a double positive effect on the AHV bill: because you pay premiums for longer and because you receive AHV for a shorter period – as long as everyone actually works longer. However, a higher retirement age is not popular. Instead, economists at UBS calculated how other factors influence the gap in the AHV. Conclusion: The migration level has little influence on the AHV, the birth rate only moderately, but life expectancy does. According to the study, the AHV gap will be two and a half times larger if average life expectancy for Swiss men increases from the current 82 years to 91 years in 2070 than if life expectancy were to “only” increase to 87 years.

What role does solidarity play here?

It ensures desired redistributions (see infographic). There are disability and child pensions, as well as survivor benefits – financed by all insured persons. In addition, women’s pensions are calculated at the same exchange rate as men’s, although this should be lower due to longer life expectancy.

The redistribution of active people to retirees has been a problem for years. What does it look like today?

Better. The Supervisory Committee for Occupational Pensions publishes annual estimates of the redistribution between active and retired people. From 2014 to 2022, workers paid a total of 45 billion francs to pensioners. This is because the pension funds used proportionately more income for retirees than they allocated in the form of interest to active participants. However, as health insurance funds have now adjusted their parameters and reduced conversion rates for new retirees, redistribution has weakened. In 2019, retirees received 7.2 billion more than would be mathematically correct, but in 2021 that was only 200 million. And in 2022, even the active benefited, also by 200 million.

What are the conversion rates for today’s retirees?

According to pension fund association Asip, the bandwidth is between 4.1 and 7.2. This means that someone with the conversion rate of 4.1 receives 4,100 francs in pension per 100,000 francs of pension capital per year, but the person with the high rate receives 7,200 francs. They may both be on the same PK, but they retired at different times. Because the BVG obligation includes a legal minimum of 6.8 (wage up to approximately 88,000 francs), health insurers can only reduce the conversion rate for higher incomes. Those with low wages who are assured of a mathematically too high pension benefit indirectly from this.

How high are the interest guarantees for the conversion rates?

Each exchange rate corresponds to a lifetime interest guarantee given to the respective retirees. With a conversion rate of 4.1 this is less than 1 percent, with 7.2 this is more than 5 percent. However, this interest rate has not been achieved with safe investments for a long time. An interest rate guarantee that is too high forces the PK to take higher investment risks; this is mainly financed by active people with large pension savings. These have a lower interest rate than would otherwise be possible.

Will there be a redistribution because of the minimum interest rate?

Yes, because the Federal Council established it in the autumn of the previous year: 1.25 percent is guaranteed for 2024. However, if the effective return at the end of 2024 is lower than 1.25 percent, the active will benefit. Your pension credits are then mathematically too high. But it’s not the retirees who pay for that. The redistribution takes place indirectly to the detriment of younger and future policyholders, because the level of PF coverage decreases.

Is there a redistribution between pension funds?

Relatively little. There are subsidies for health insurers whose insured population is particularly old. In return, all PKs pay contributions to the BVG safety fund. In 2021, 185 million francs were distributed.

Some pension funds have models that are intended to compensate for the redistribution afterwards. Can they do that?

Partially. In these models, for example, the interest rates over several years for active people are added together and the interest guarantees for the individual pensioner cohorts are compared. If it turns out that pensioners with a very low conversion rate are disadvantaged compared to other pensioners and active participants, they will receive a supplement if the financial situation of the fund allows this. The general rule is: the longer a cohort has been retired, the more it has benefited from the redistribution – and the less likely it is that this can be compensated with allowances for other cohorts.

But there is no redistribution in pillar 3a, right?

Not at first glance, because you are only saving for yourself. But: You can deduct the benefits from your taxable income. And the higher this, and therefore the tax rate, the more profitable the third pillar is: you save more taxes. Because the tax losses come at the expense of the general public, they can be seen as a redistribution among the wealthy. Theoretically, the reverse model would also be conceivable: the state could provide fixed subsidies for private pension provision instead of deductions – similar to family benefits. Everyone there receives the same amount, but has to pay tax on it. The higher they are, the more they earn.