Rethinking the Swiss pension system: a thought experiment

It is widely known that the Swiss pension system is under pressure. The population is getting older and drawing a pension for longer, while the number of people in employment per pensioner is falling. This puts particular strain on OASIOld-age and survivors’ insurance is part of the state pension system, which operates on a pay-as-you-go basis: Today’s employees directly finance current pensions through their contributions.

The second pillarfor Occupational pension scheme also faces challenges. The conversion rateof pension fund explained, which is used to convert accumulated assets into an annual pension, is falling because of rising life expectancy. This is because pensions have to be paid out over a longer period.

In addition, the level of cover under the current system varies depending on the employment and family model. People who work part-time, unmarried couplesThere are no legal provisions applicable to cohabitation or those with caring responsibilities sometimes have less comprehensive cover.

In light of these challenges, UBS experts used a thought experiment to explore how a pension system could be redesigned under current conditions. The focus was less on individual reform measures and more on how the system as a whole could be designed for the long term.

In their thought experiment, they analyzed the strengths and weaknesses of the current pension system and examined various ways of addressing them. Based on this, they developed an approach for a more sustainable retirement provision system, including its implementation from 2035.

The goal: a more stable and equitable system in the long term that provides targeted support where it is genuinely needed.

The new pension system would change all three pillars of retirement provision. The key points are summarized below:

Pillar 1: from pay-as-you-go to a funded system

In the system outlined by the UBS experts, each person would build up their own retirement capital. Employers and employees would together contribute 20% on the first CHF 50,000 of annual salary. This money would be invested and earn a guaranteed rate of interest. If the investment return were insufficient to guarantee this rate of interest, the federal government would pay the difference from tax revenue.

The objective: to provide better cover than today for people on low incomes with an uninterrupted employment history. For example, a person who works full-time from age 20 to 65 and earns an average of CHF 50,000 a year would receive a pension from the first pillar that is around 62% higher than today.

The system would also offer greater flexibility when retiring. The retirement age would be partly linked to life expectancy and would therefore rise slightly from one generation to the next. However, anyone who had accumulated enough retirement capital to cover their basic needs for life could retire earlier. 

Pillar 2: more choice of providers and investment strategies

The second pillar would become much more individualized. Insured persons could choose their provider and investment strategy themselves, rather than being tied to their employer’s pension fund as they are today. The capital guarantee would be removed. Retirement capital would therefore be more directly exposed to financial market fluctuations, creating greater return opportunities but also higher risks. For example, returns could be negative in poor stock market years. However, the model calculations take less favorable scenarios into account and still assume positive returns over the long term.

Further, contribution rates would no longer increase with age but would be the same for everyone. This would ease the pressure on older employees, who currently cost employers more than younger employees. Contributions to the second pillar would also become mandatory for self-employed people.

In addition, lump-sum and pension payments would receive the same tax treatment when drawn.

Pillar 3a: greater tax benefits for lower incomes

Today, people on higher incomes generally benefit more from the tax advantages of voluntary saving in pillar 3a. Under the proposed system, the relative tax benefit would be greater for lower incomes. Insured persons could also contribute higher amounts than they can today.

There would also be changes when benefits are paid out. Unlike today, no tax on lump-sum withdrawals would be payable when benefits are drawn at retirement under the proposed system. Partial withdrawals would also be possible. 

The new system also envisages changes outside the three pillars. One new area would be added, while two existing areas would be regulated differently.

New long-term care insurance as a fourth pillar

A completely new feature would be mandatory long-term care insurance, with everyone paying premiums from age 45. In retirement, it would cover long-term care costs and the associated additional costs.

Today, long-term care costs are largely covered by health insurance and by the cantons and municipalities, with the latter financing their share through taxes. By contrast, those affected largely have to pay the additional costs themselves, such as personal care and accommodation in a care home. The insurance would spread the financial burden, provide greater predictability and, for the first time, protect long-term care as a separate component of retirement provision.

Changes to disability and survivors’ protection

Survivors’ protection would be separated from the first and second pillars and financed through general taxation. Children would continue to have mandatory cover through a tax-funded orphan’s pension. Cover for a surviving partner, however, would be voluntary.

Disability insurance would remain in pillar 1 but would no longer be mandatory in pillar 2.

This would increase individual choice. Today, for example, single people or people without children also help finance risks that do not affect them.

Supplementary benefits: automatic eligibility checks

Supplementary benefits support people whose retirement provision is insufficient to cover their living costs. In future, eligibility would be checked automatically using tax data. This would mean that those eligible would no longer have to apply for the benefits themselves.

At the same time, the asset thresholds and repayment rules would be tightened. If assets subsequently increased again or the recipient received an inheritance, the benefits received would have to be repaid. This is intended to target support more effectively at the people who genuinely need it.

Overall, the proposed retirement provision strategy would benefit people who currently have less comprehensive cover.

The greatest beneficiaries would be people on low incomes with an uninterrupted employment history. Median earners would also benefit. Based on the example in the study, a person earning an average annual salary of CHF 85,000 would receive a pension from pillar 1 that is 33% higher.

Parents working part-time would also be better off, benefiting from more generous tax-funded child-raising credits and better protection for modern living arrangements.

By contrast, high earners would have to shoulder more themselves, as their tax benefits under pillar 3a would be lower. The second pillar would be mandatory for self-employed people. This means they would have to contribute part of the income that they can use freely today. 

“Demographic change poses particular challenges for the long-term financing of pillar 1. However, immediate measures alone will not be enough in the long term. For OASI, this means that salary contributions or VAT rates would have to be increased further in the future if no other changes were made.

Long-term questions are best addressed by taking a structural view of the retirement provision system. The three-pillar model is now more than 50 years old. We therefore want to encourage discussion about whether it still meets the needs of our society today.”