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Pension Reform 2020 – National Council resolution of September 2016 less onerous for young people; more reforms needed
The politically challenging Pension Reform 2020 is an important step forward for the Swiss retirement system. Using the methodology of intergenerational accounting UBS aims to increase transparency around the funding gaps in the first pillar (AHV). The results of the latest consultation round (National Council) imply that the improvements in the AHV funding gap would be comparable with those resulting from the resolution of the Council of States, but smaller than if the Federal Council's original proposal was implemented.
Zurich, 12 December 2016 – The pension commitments of the AHV exceed its expected future revenue by approximately CHF 1 000 billion. Without far- eaching reform of the pension system, it is unclear how pensions will be funded in future. The proposal of the Federal Council and the resolutions of the National Council and Council of States are a first step towards improved funding, but the differences between the proposals are substantial. UBS and the "Forschungszentrum Generationenverträge" (FZG, Research Center for Intergenerational Contracts) at Freiburg University analyze the effects of the National Council resolution on the AHV in terms of their sustainability and intergenerational fairness.
Fig. 1: AHV funding gap
In percentage of GDP, productivity growth = 1%, real interest rate = 2%
If all the National Council measures for the Pension Reform 2020 were implemented, the funding gap for the AHV would decline from 173.4% of GDP or approximately CHF 1 000 billion, by 61.1% to 112.3% of GDP. Compared to the proposal of the Federal Council and the resolution of the Council of States of September 2015, the resolution of the National Council would improve the funding gap of the AHV to a similar degree as the resolution of the Council of States (figure 1).
Of the National Council’s individual reforms the greatest relief comes from the increase in VAT. As the VAT increase of 0.6 percentage points would be significantly smaller than the increase of 1.5 percentage points in the original Federal Council proposal and the 1.0 percentage points in the resolution of the Council of States, the relief for the AHV would also be significantly smaller at 28.4% of GDP. Raising the retirement age for women to 65 would reduce the AHV funding gap by 15.4% of GDP. The new provisions for the survivors’ pension would reduce the gap by 10.3% of GDP, and the elimination of the child’s pension and increase in the Federal contribution to the AHV to 20% would similarly increase the relief to the AHV by 5.0% and 3.2% of GDP respectively. However, the resolution of the National Council includes increasing the flexibility of retirement, which would burden the AHV by 1.3% of GDP in the long term.
Under current legislation, all generations currently alive will draw more benefits from the AHV over their remaining lifespan than they will pay into it (negative net payments, see figure 2). Implementing the National Council’s resolution would mean that people of working age would continue to draw more in benefits over the rest of their lives than they will pay into the AHV. Only those under 25 would contribute more to funding the AHV over the remainder of their lifespan than they will receive in benefits (positive net payments).
Fig.2: AHV generational balance sheet
Net payment per resident over remaining lifetime, CHF 1 000, productivity growth = 1%, real interest rate = 2%
While achieving a similar total improvement in funding for the AHV as the resolution of the Council of States, the resolution of the National Council succeeds in distributing the burden of reform more equally between the generations by abstaining from increasing the AHV pensions by CHF 70 (figure 3). Through this decision young and future generations – that carry the large share of the burden in all proposals – are strained less. The resolution of the National Council places a smaller burden on all generations compared to the proposal of the Federal Council. Even if this may initially seem advantageous, it should be remembered that the National Council resolution would not close the AHV’s sustainability gap to the same extent as the Federal Council proposal would. While a smaller reform today also means smaller burdens for the present generations, additional future reforms will be required.
Fig. 3: Reform burden by age
Reform burden over remaining lifetime, CHF 1 000, productivity growth = 1%, real interest rate = 2%