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UBS Retirement Forum – Effects of the Pensions 2020 draft reform plans – Federal Council vs Council of States
The proposal of the Council of States to reform Swiss pensions is less extensive than that of the Federal Council, as it would merely reduce the AHV financing gap to around CHF 654 billion, or 111% of GDP, compared with the Federal Council's proposed reduction to CHF 482 billion (82% of GDP). Both draft plans are a step in the right direction, although the heavy burden of restructuring the pension system will be borne primarily by younger and future generations. The greatest risk to these generations lies in the rejection of both proposals.
Zurich, 3 February 2016 – In a bid to finance today's high conversion rates, pension funds are already redistributing billions from insured persons in employment to pensioners. In the case of the Old-Age and Survivors' Insurance (AHV), income is still just about enough to cover its expenditure. The AHV compensation fund generates enough revenue to offset the AHV's negative operating result. However, given the present demographic shift, this situation is only temporary. In just a few years, most baby boomers – the generation resulting from the post-war rise in fertility rates – will cease to pay into the AHV and begin drawing their pensions, while fewer young people will be entering working age. This means that even while taking into account the income from the AHV fund, the AHV will no longer generate sufficient revenue to cover its expenditure in the future. This discrepancy between incoming and outgoing funds is referred to as the AHV financing gap. Two concepts for the Pensions 2020 reform have now been brought to the negotiating table – the proposals from the Federal Council and from the Council of States.
Against this backdrop, the Intergenerational Compacts Research Centre at the University of Freiburg im Breisgau and the economists at the UBS Chief Investment Office WM collaborated in analyzing the long-term outlook of the Swiss pension system based on the two reform proposals. While both proposals are a step in the right direction, neither is a panacea. They both only secure financing of the AHV for a few years. There are also indications of a worrying intergenerational imbalance in the future. "It is primarily the young that will have to shoulder the burden of financing the reform," explains Prof. Bernd Raffelhüschen, Head of the Intergenerational Compacts Research Center.
Although both proposals would yield similar results in terms of the AHV's finances until 2030, the Federal Council's proposal would lead to a greater long-term reduction in the AHV financing gap from around CHF 1,020 billion (173.4% of GDP) under the current law to around CHF 482 billion (82% of GDP). The Council of States' proposal, by comparison, would ease the AHV's burden by around a third, resulting in a financing gap of CHF 654 billion (111.2% of GDP).
For voters and those currently insured under the AHV, the reform concept submitted by the Council of States might seem more agreeable, representing a "smaller reform," that reduces the current burden of restructuring in comparison with the Federal Council's proposal. The Council of States' proposal, however, will require greater reform in the future. In particular, the planned AHV pension supplement of CHF 70 a month, intended to compensate the losses arising from the reduction in Pillar 2 benefits, would mean that the current working population would carry a lower overall burden than under the Federal Council's proposal. A point of particular concern, though, given the heavy charge placed on the younger and future generations, is that those close to retirement would, all in all, find themselves in an even better position under the Council of States' concept than they do under current legislation.
How the National Council assesses the two proposals for the Pensions 2020 reform remains to be seen. From the perspective of the younger and future generations, it would be best if the National Council took steps toward a fairer distribution of the financing burden arising from pension reform across the generations. "Fairer distribution across the generations could be achieved, for example, by means of a temporary smaller adjustment in pensions in relation to inflation and wage growth," argues Veronica Weisser, economist and pension expert at the UBS Chief Investment Office WM. "By contrast, tax and contribution rate increases primarily burden younger and future generations." Future burdens on the AHV's finances caused by rising life expectancy could also be shared more equally among the generations by raising the ordinary retirement age in line with the increase in life expectancy. For the younger and future generations, pension reform is crucial. Saving for a private pension is ever more important for them.
The complete study conducted by the Intergenerational Compacts Research Centre at the University of Freiburg im Breisgau and the economists at the UBS Chief Investment Office WM can be downloaded from the following link: www.ubs.com/vorsorgeforum
UBS Switzerland AG
Veronica Weisser, economist and pensions expert / Head CIO WM Swiss Macro and Sectors
Tel. +41 44 234 50 62
Daniel Kalt, Chief Economist Switzerland
Head CIO WM Swiss Investment Office
Tel. +41 44 234 25 60