The Swiss pension system is in a tight spot, according to a UBS study "Retirement provision in Switzerland and the generational balance sheet: postponing payment day".
Andreas Schlatter, member of the Swiss Federal Occupational Benefit Plan Commission and head of UBS Global Asset Management Switzerland, said: "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."
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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.
Veronica Weisser, economist and pension expert at UBS, said: "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."
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.
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By GlobalDataThe study 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.
Prof. Bernd Raffelhüschen, head of the Research Center for Generational Contracts, said: "Given a financing shortfall of this size, it cannot be claimed that the AHV is being financed sustainably."
Future generations will therefore face greater liabilities.
