Last month, Swiss voters denounced a pension reform plan that would have increased taxes and raised the female retirement age, but the country’s pension problem persists.
The Pension 2020 reform was two years in the making—and controversial in its own right. Not only was there heavy criticism among political parties and the Swiss population, but the Swiss Federal Council, Parliament, States Council, and general public’s votes were neck-and-neck. While Parliament and the States Council voted in favor at 101-92 and 27-18, respectively, the people would ultimately decide against Pension 2020 in a 52.7%-47.3% showing.
“I think that in the last couple of crucial weeks, voters have realized that there were too many pitfalls and unwanted new and complicated regulations, that not even experts ultimately recognized in some cases. Finally, they also realized that it corresponded, in fact, to a substantial increase of social security benefits that would soon require additional funding, although the government presented all as a sustainable package,” Peter Zanella, director of retirement service, Willis Towers Watson (Zurich office), told CIO in an email. “I am proud of the reasonability of my compatriots and that they did not give in to the pessimistic scenarios of some high officials,” he added.
Had the overhaul been accepted, Pension 2020 would have reformed the first two sections of Switzerland’s three-pillar pension system. The reform would have not only equalized the male and female retirement ages to 65, but taxes would have been raised by CHF 70 per month for single citizens and CHF 226 for married couples—mostly due to criticisms that suggest marriages are penalized by the current payments.
The system also would have increased social security and value-added tax (VAT) rates to better fund the Swiss pension system. Social security taxes would have risen by 0.3% in 2018—half of which would have been paid directly by the employer—and VAT rates would have increased by the same amount from 8% to 8.3% in the same year. VATs would also have increased to 8.6% in 2021. The government felt that the reforms would introduce more flexibility for retirement between the ages of 62 and 70.
“The proposed legislation package was full of provisions that were not necessary and in some cases aimed to restrict current practice without need (e.g., early retirement would have been only possible after 60 as opposed to the current 58. Another provision forced the pension funds to accept purchases to buy in past service years without sufficient funding),” Zanella said.
“There’s good and bad news coming from the rejection of the pension reform. The bad news, let’s say now, for more than 20 years no result has passed and the reform is really urgent, especially for the first pillar,” Andre Tapernoux, Wealth Leader Switzerland, Mercer told CIO. “I think the good news about this first is the margin is much narrower maybe than earlier rotations. In some ways you can say even the popular vote was very different. It was very close, and I think one of the reasons why it was rejected was that it was a combination of first and second pillars. It is very likely that the next reform will be voted on separately—on the first and then second pillar individually—then at least the measures for additional funding and some reductions in benefits will pass.”
That said, Switzerland’s pension scheme still has a problem.
According to an article on the Swiss government’s website, the main reason Pension 2020 came to be is, in addition to increases in life expectancy and low interest rates, the baby boomer generation is approaching retirement age—and the government fears that a sudden burst of retirees could cripple the system in the coming years.
In the case of Switzerland’s old-age pension reform, there have been 15 referendums on the pension scheme since 1931, according to the Swiss Federal Chancellery. Of these, only two have been voted in favor by the population: one in 1947 (the second introduction of the age-old pension system), the other in 1978 (the scheme’s first reform). While votes are essential to the country’s heavily democratic system, history has shown that the voice of the Swiss voter is a loud one, as the popular vote does not allow for reform to happen as quickly as officials have hoped.
“If this was rejected, it means at least a huge part that also rejected this reform did not reject some reductions that they felt was necessary, but rejected more these increases and very generous measures in compensating the gaps in the second pillar,” said Tapernoux. who added that investors should expect a new reform for the first pillar and a partial second-pillar reform in about five years. Tapernoux said that the passing of this act would leave enough room for first-pillar expenses for at least a decade—as well as enough time to find a more sustainable solution than Pension 2020 proposed.
“In my view, the outlook is more or less the same,” he said. “There’s a bit more insecurity about the future as it could be that nothing will pass, but I would still be optimistic that some measures will pass and it may be cheaper in some way for the economy.”
To save its pension system from a possible insolvency, Switzerland again will need to its proposals to better fit the needs of the people. While the main issue lies in the voting system, a major change is out of the question. However, minor alterations to Swiss legislature could do wonders for the troubled pension.
“It would be unrealistic to change the voting system, as it is in some way the DNA of Switzerland. On the other hand, there are some things to be considered whether it was a wise decision to have the conversion rate—the rate when a lump sum of retirement is converted into an annuity—to have that in the law, to fix it for a very long time when this has to be recalculated from time to time. From that point of view, I also think that there are some things that should be taken out of the law and should not go to a popular vote,” Tapernoux said.
According to Zanella, there are many “real urgent issues” the nation must address. First, he says, it must decrease the second-pillar conversions rate with “reasonable compensation methods without complicated costly grandfathering regulations over many years.” He also suggests an equal and flexible retirement age that reflects “both demographical and economical realities,” as well as an adjustment and increase of funding for the old-age system. Finally, he said, Switzerland should consider “no unnecessary further regulations that only lead to higher cost without benefit for the insureds.”
“What should be there for sure is an increase in retirement age for women from 64 to 65, just to make both genders equal. What also is needed is some additional funding measures which will probably be an additional add on to the tax,” Tapernoux added, suggesting the exclusion of additional benefits for the future and an additional pension increase of 70 Swiss francs per month, which was rejected from Pension 2020 as voters “found that was not the right measure to say we need additional funding and then increase benefits.” While an increase in retirement age is necessary, Tapernoux doesn’t think that the next reform will call for one. Instead, he opts for a more open-retirement clause.
“Another thing I think should be in the reform is making retirements more open, to give everyone from a social security point of view the rights to work longer than age 65. In some jobs, it’s a rule that you have to leave after age 65,” he said. “Sometimes retired Swiss professors go to the US because they still want to work.”
Switzerland’s Federal Department of Home Affairs could not be reached for comment.