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UBS Pension Forum: the future of retirement provision and a new study on the Swiss generational balance sheet
Pension promises for AHV (Old-Age and Survivors' Insurance) currently exceed future income by 173.4% of Swiss GDP. The increase in burden for young generations compared to today's pensioners is substantial, as demonstrated in a new study on retirement provision in Switzerland and the generational balance sheet.
Zurich/Basel, 3 April 2014 – The Swiss pension system is in a tight spot. "Since the 11th revision of the AHV was struck down in Parliament and the decrease of the conversion rate was rejected in 2010, the division between the need to reform the system and the ability to reform it has grown further," said Andreas Schlatter, member of the Swiss Federal Occupational Benefit Plan Commission and Head of UBS Global Asset Management Switzerland. While few doubts remain among experts as to the necessity of reform, there is uncertainty in large parts of the population. Can our pension system be financed over the long term? How great is the financing shortfall and how will different generations be forced to absorb the burden?
To address these issues, the Research Center for Generational Contracts (FZG) at the University of Freiburg (Breisgau) and economists at the UBS Chief Investment Office WM collaborated to analyze the long-term outlook for the Swiss pension system and government finances using the latest economic data. "There is a close relationship between pensions and the government budget – pension promises that cannot be financed from the pension system are ultimately a liability that the state must meet," explained Veronica Weisser, economist and pension expert at UBS. This implicit government debt can be calculated based on the future imbalance between the spending and income trends of the government budget. In terms of pensions, the contributions and pension payments for each generation are compared taking into account demographic trends.
The new UBS study "Retirement provision in Switzerland and the generational balance sheet: postponing payment day" clearly shows that implicit government debt in Switzerland grossly exceeds the level of explicit debt.
The main results of the study are:
- AHV financing shortfall: Pension promises for AHV (Old-Age and Survivors' Insurance) currently exceed future income of the AHV by 173.4% of Swiss GDP, which corresponds to approximately one trillion CHF.
- Generational fairness: The AHV burden increases sharply as the years go on. If we assume that the AHV financing shortfall is to be eliminated from 2025, then the additional burden (contributions over benefits received) will be CHF 1,590 for each year of a person's life for those born in 2010 and CHF 860 for someone born in 1980, compared to a person reaching retirement age today (i.e. born in 1949). By contrast, pensioners are in a significantly better position today: the burden for an 85-year-old (born 1929), for example, is around CHF 680 less for each year of their life than for a new retiree aged 65.
- Sustainability gap: Implicit government debt in Switzerland is 167.4% of GDP. Together with explicit debt amounting to 35.5% of GDP in 2011, Switzerland's actual government debt stands at 202.9% of GDP, which corresponds to approximately 1.2 trillion CHF. If this is offset against the explicit capital amounting to 36.9% of GDP in 2011, Switzerland has a sustainability gap of 166.0% of GDP, or about 970 billion CHF.
These results cast doubt on the sustainability and generational fairness of the AHV – the intergenerational compact is under threat. "Given a financing shortfall of this size, it cannot be claimed that the AHV is being financed sustainably," emphasized Prof. Bernd Raffelhüschen, Head of the Research Center for Generational Contracts (FZG). Future generations will therefore face greater liabilities.
First UBS Pension Forum: Debate regarding generational fairness and the future of retirement provision in Switzerland
Today at the UBS Pension Forum, a top-class panel of pension experts will discuss what the significant increase in burden for young generations and the lack of sustainability in the pension system means for the future of retirement provision in Switzerland. Discussion participants are Professors Bernd Raffelhüschen and Peter Gross, Jérôme Cosandey from Avenir Suisse as well as Daniel Kalt, Veronica Weisser and Andreas Schlatter from UBS.
Economist and pension expert / Head CIO WM Swiss Macro and Sectors
Tel. +41 44 234 50 62
Daniel Kalt, Chief Economist Switzerland
Chief Economist Switzerland & Regional CIO Switzerland
Tel. +41 44 234 25 60
Retirement provision in Switzerland and the generational balance sheet: postponing payment day: www.ubs.com/vorsorgeforum