Demographics require creative rethinking
An aging population is challenging pension systems worldwide. This is especially true in Switzerland. While other countries have already acted when it comes to reform, Switzerland is a laggard.
In Switzerland, the aging of the population is more advanced than in many other industrialized countries. This has led to a massive increase in the duration of pensions, which is a burden to the system. Unlike Switzerland, though, most countries have already made adjustments so their pension systems are fit for the future.
To slow down the future increase in the duration of pension payment, more than half of the countries in the OECD are raising the retirement age up to 68 for everyone. In the United Kingdom, the idea has even been introduced to adjust the pension payment period for each generation to 10% of life expectancy.
The increased pension duration is due to the major increase in life expectancy. This is partly thanks to medical progress, which comes at a price. In Singapore, this case is already provided for during working age with a mandatory sickness fund contribution, which can only be accessed when you reach retirement. Health insurance in Switzerland is relatively comprehensive, but the costs of care in old age are often underestimated and could be eased by mandatory pre-financing.
Norway introduced a pension account system about 20 years ago. The capital paid in is credited to a personal but fictitious account. In this, the interest rate on the fictitious account is adjusted to reflect generation-specific life expectancy. Cohorts with higher life expectancy receive a lower monthly pension for the same amount of capital. Sweden has introduced a different automatic adjustment, the “automatic balancing mechanism.” If spending on pensions exceeds income, retirement assets and pensions are adjusted less as wages have gone up. Once the situation has recovered, the appreciation multiplier improves. These solutions are purely rules-based and depoliticized.
The US and Hong Kong have defined contribution schemes. These systems often allow members to select their investment strategy themselves. Australia offers a completely free choice of pension fund. This means the policy holder has to pay more careful attention to their retirement savings and take more responsibility. At the same time, greater competition forces more transparency and fairness within the system between the generations.
It is not as if Switzerland lacks examples of how to reform pensions for the first and second pillars. However, the third pillar also has potential for improvement, as private retirement savings will become even more important in the future. One idea would be to make 3a more attractive, for example by giving the option to make up for “3a gaps” arising from missed payments by making (partial) buy-ins.