In the coming years, the emphasis will have to be placed on the intergenerational financing of uncovered pension promises. Several compromises will have to be reached that will fairly distribute the burden between generations and socio-economic groups.
The AVS benefit promise was significantly expanded in 2024. In the coming years, the emphasis will have to be placed on intergenerational financing of uncovered pension promises. There are several options – raising the reference age, increasing revenue through higher taxes and contributions or structural adjustments. It is clear that a single component will not be enough on its own. Several compromises will have to be reached that will fairly distribute the burden between generations and socio-economic groups.
Even before the vote on the initiative on the 13th AVS pension, it was clear that the future of financing the AVS was not assured, with or without the 13th pension. The remaining life expectancy of pension recipients has increased by more than ten years since the introduction of state insurance. And this trend will only increase as larger age cohorts enter retirement.
From 2026, the 13th annuity will lead to additional annual expenses numbering in the billions. With current financing gaps of around 177% of 2021 gross domestic product, or 1,315 billion Swiss francs, a structural reform that enjoys broad support, is effective in the long term and is based on several components and compromises is essential.
Pay more than previous generations
To finance the 13th AVS pension and avoid the rapid widening of the AVS deficit, the Federal Council initially proposed financing based on increases in employee contributions and VAT. In the end, he submitted a proposal to Parliament that only included a VAT increase. All the proposals submitted so far by the Federal Council would certainly cover the additional expenses in the medium term, but in the long term, the funding gap for the AVS would increase with the 13th AVS pension and the proposed financing measures.
To completely close this gap, contributions and taxes could be increased even further. Regardless, both measures will have significant potential repercussions. An increase in VAT could weaken consumption and would weigh more on the most disadvantaged socio-economic groups than on the wealthiest. This is because their expenses are relatively higher compared to their total income and they have less flexibility to adjust them. Furthermore, an increase in employee contributions could lead to stagnation in wage and employment growth, and have negative consequences for the economy.
Work longer for a longer retirement
Given the gap in the relationship between the length of working life and the time spent in retirement, combined with the disproportionate increase in the number of pension recipients compared to active people, an increase in the reference age must be considered. . However, the figures also show that fully financing current pension promises by raising the retirement age would require such a delayed retirement that such a measure is currently not politically feasible. .
“A reference age dynamically indexed to increasing life expectancy is a solution that must be studied. The reference age would thus progress more slowly, but also longer and to a higher level. It could also be adjusted according to adverse demographic developments,” explains Veronica Weisser, economist and pension specialist at UBS.
Full inflation compensation would help maintain living standards
Thanks to the regular adjustment of pensions on the basis of the mixed index which is made up of equal parts of the price index and the wage index, pension beneficiaries participate in economic growth. As wages have increased more than prices since the introduction of mixed indexation, a trend which is expected to continue in the future, they are actually benefiting from an increase in their real pensions.
Compensating for the rise in prices would be enough to maintain the standard of living of these generations. If, in the future, AVS pensions followed the evolution of prices more than that of wages, this would be beneficial to the financial situation of the AVS.
Equal treatment of survivors is more important socially than financially
According to a ruling by the European Court of Human Rights, Switzerland is required to guarantee equal treatment between widows and widowers with regard to survivors’ pensions. While until now women have been granted significantly more generous benefits based on historical social norms, in the future much more emphasis will be placed on ensuring the standard of living of surviving children.
In other words, instead of providing widowers with the same benefits as widows, women should be promised less by combining it with a transition period. These changes would have a slightly beneficial effect in closing the AVS funding gap.
A reasonable compromise with structural help
The application of several different measures will ensure the sustainability of the pension system. As for the weight to be given to each of these measures, this is a political decision. It is clear that AVS is becoming less and less attractive for younger generations and that the need for compromise is increasing.
“In any discussion, it is important to ensure that the advantages of the current system are preserved for future generations and that the additional burdens are distributed as widely as possible,” explains Jackie Bauer, economist and pension expert at UBS.
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