The aging of society has many consequences: People reach higher and higher ages – and stay young for longer and longer. This encouraging development is a challenge for society at various levels – not just financially: the number of retirees in Switzerland will grow by 900,000 (+ 61%) to 2.4 million by 2035, while the working population will only increase by 7% in the same period.
The self-assured and financially strong generation of baby boomers also opens up opportunities for a growing market in the areas of health, finance, leisure and lifestyle. For the ability to serve this market, flexible working models, a systematic dialogue with senior citizens in the company, and rendering the retirement age more flexible are necessary for keeping older employees in the company. An increase in the pension age helps stabilizing first pillar pension finances. At the same time, the organization of the care for the elderly needs optimizing over the whole supply chain in order to be able to cope with the growing demand for personnel and the rising cost.
Life expectancy is increasing continually, and this may provide many positive aspects for society in general. However, this phenomenon may also result in significant challenges for our current economic policies as baby-boomers reach retirement age, require increased medical services and enjoy greater leisure activities and consumerism. Another issue is that the number of people leaving the workforce may exceed the number of young people entering the labor market. These issues are at the center of the current debate in Switzerland due to their impact on the financing of retirement pensions and social security reforms.
Switzerland’s retirement pensions are based on a tripartite pillar contribution system. The first pillar, which is mandatory, is the basic Swiss Social Security System (in French “Assurance Vieillesse et Survivants” or AVS), which is old-age and survivors’ insurance, is mandatory. It includes insurance for loss of earnings during military service, maternity leave, and unemployment. The second pillar, labeled “Occupational benefits provision system” (in French “Prévoyance professionnelle” is mandatory. It is a complementary pension fund to the 1st pillar and covers the risk of disability and death. The third pillar, “3e pilier,” is a voluntary, private pension that is tax deductible.
The first pillar (AVS) is based on distribution. It is essentially a solidarity-based system in which the active, working generation makes contributions that pay for the pensions of the retired generation. It also has a fiscal solidarity component, in that the amount of pensions paid is capped to a maximum (currently CHF 2’350 per month for a single individual), but the amount of contributions due on salaries is not. During their career, employees with higher earnings will pay more contributions to the AVS than they will receive in pension after retirement.
The 2nd pillar (Occupational Benefits Provision) is based on capitalization. Contributions paid to that cause both by employers and employees during a professional lifetime, in addition to the interests generated, are capitalized in pension funds, and are used at retirement to finance an additional pension to the “basic” one from the 1st pillar. However, due to the current low interest rates, some of today’s younger people in the workforce have expressed concern regarding the investment of their contributions and the impact on their own retirement.
There seems to be a direct correlation between the change in demographics and the impact on the real economy. Beyond the present concerns regarding the financing and payment of pension funds, the social reality brought about by an aging population reverts to other economic concerns, such as medical treatments, hospitalization costs, services, and consumer goods. Although increasing the population of immigrants could be beneficial, it should not be the only approaches for guaranteeing economic prosperity. Currently, there is a firm belief that working structures should be re-evaluated. One possibility is to encourage employees through training and incentives, and increasing the official retirement age (currently: 65 for men, 64 for women) is a main focus of the debate. Doing so would increase the number of experienced employees in the workforce.
Recently, the Swiss Federal Assembly voted in favor of a reform of the first and second pillar pensions bearing the name of “Prévoyance 2020”. It is important to know what this reform entails. Formal retirement age for women will be increased to 65, equal to men. Married people, who currently receive a pension that is 150% of the pension for single people (currently maximum 42’300 per year) could benefit from an additional 70 CHF monthly amount increase for all new AVS pensions. The “conversion rate” for the 2nd pillar (used to define the amount of a monthly pension due for a certain nominal capital) will decrease from 6.8% to 6%, mainly in order to adjust to the realities of constant increased life-expectation. Swiss VAT will increase from 8% to 8.6%, part of which will help finance the AVS system. The Swiss population will be asked to vote regarding this last point in September 2017. If voters accept this referendum, changes will be implemented on January 1, 2018.
Our society’s demographic evolution seems to not only affect the financing of old-age pensions but also the need to address adjustments in the labor market. Regarding the care of our elderly, the changes go far beyond purely financial considerations. Avenir Suisse believes in the benefits of flexible work patterns; older employees are favorable to working beyond retirement age and employers wish to retain their valuable knowledge in the company. Supporting and reinforcing this dialogue is necessary in order to help finding new innovative patterns. Even if flexibilization of retirement age is desired by many, it would not be sufficient to impact the funding of the AVS. Only an actual increase of the formal retirement age would have a relieving effect on the AVS financial burden.
Jérôme Cosandey, A Solid Foundation for the Age Pyramid – Coping with Demographic Change (Avenir Suisse, April 2017)