Opinions - 27.02.2017 - 00:00 

Old-Age Provision 2020: a check on facts

The foreseeable deficits in the Old-Age and Survivors’ Insurance and the redistribution in the Professional Pension Schemes are forcing politicians’ hands. What is the state of that hard nut to crack: old-age provision in Switzerland? An op-ed by Martin Eling, Professor of Insurance Management at the University of St.Gallen (HSG).

28 February 2017. After the ballot on corporate tax reform, the next big reform project awaiting decisions is the Old-Age Provision 2020: first with a showdown in the National Council and the Council of State, then – if they manage to agree – a popular vote in the autumn. At present, all the signs point to confrontation, and many people surmise that this reform, too, might end in tears.

This is dangerous brinkmanship, for the protagonists of the left and the right agree that after years of deadlock, we cannot afford a failure of this project. Thus the 2016 apportionment results of the first old-age provision pillar, the OASI, will be in the red for the third consecutive year. After CHF 320m. in 2014 and CHF 579m. in 2015, the 2016 deficit will again amount to at least half a billion. And the projections of the Federal Social Insurance Office bode ill for the future: from 2021 onwards, an apportionment deficit of more than a billion francs is expected.

A deficit of seven billion francs in the pension schemes by 2030

For 2030, the deficit is even expected to rise to CHF 7bn. Thus in sum, a deficit of more than CHF 40bn will accrue in the coming 15 years. And the OASI Fund, which is still brim full today, would be used up in 2030. These latter figures may only be FSIO forecasts, but in contrast to other forecasts they are characterised by a relatively low degree of uncertainty. Demographic development is a given, and the FSIO’s assumptions about immigration and economic growth, for instance, are even rather optimistic. In the second pillar of the old-age provision system, i.e. professional old-age provision, the problems are even bigger.

For there, amounts to the tune of billions have been redistributed from the gainfully employed to pensioners for some time. The backdrop to this is the statutory conversion rate of 6.8 per cent, which is distinctly above any values that insurance mathematics would regard as reasonable. At the present interest rate level, the conversion rate of 6.8 per cent means that the money will be used up after just under 15 years. In point of fact, however, women continue to live for 23 years after retirement and men for about 20 years. Figures published by Credit Suisse in 2012, according to which CHF 3.5bn. are redistributed in the second pillar year after year, appear to be too low today. UBS, for example, latterly quantified the redistribution from gainfully employed to retired people at six to eight billion francs per annum. It is important to point out here that these figures about the second pillar are not forecasts for the future but express redistributive transactions that are actually taking place now. Forecasts for the future are similarly dramatic for professional old-age provision as they are for the OASI but will not be mentioned here today since they contain a distinctly higher degree of uncertainty, for instance with regard to future interest rate levels.

Pension reforms on the brink

Reforms are therefore urgently required but are on the brink of the abyss. At present, the main bones of contention are two funding issues: on the one hand, the OASI supplement of 70 francs by way of compensation for the reduction of the conversion rate in professional old-age provision; on the other hand, the extent of a possible increase in value-added tax. In both cases, the argument is put forward that the reform will be too costly. The supplement of 70 francs will increase the OASI apportionment deficit, while an increase in VAT will be at the expense of an economy which is in a tight spot even without it. The arguments all hold water, but a readiness to make compromises is required with regard to both issues.

A reform must be balanced and take all parties’ interests into consideration; if it doesn’t, we need not even bother to fill in any ballot papers. And the alternative would be an old-age provision system that has lost its equilibrium, develops increasingly at the expense of the younger generation and is completely contrary to international developments. Thus a majority of EU countries have paved the way for a retirement age of at least 67, for example, whereas we find it difficult to raise women’s retirement age to 65.

To cut a long story short: today, adaptations to the old-age provision system are still possible in cautious steps. In ten years, however, the system could only be brought back into balance with more drastic interventions. This sounds a gloomy forecast, but is unfortunately the case. This is why the old-age pension reform is enormously important and must succeed now. So please no more brinkmanship because of 70 francs.

Photo: joexx /

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