Fairness rather than redistribution in the second pillar - Part 1: Fairness – what does it mean?

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Fairness rather than redistribution in the second pillar - Part 1: Fairness – what does it mean?

What does fairness mean? It means that everyone receives what they are entitled to – according to clear and transparent rules. Redistribution is not envisaged in the occupational retirement provision system, but has crept in over the years. Is this fair? That's debatable.
Fairness rather than redistribution in the second pillar

Anyone who grew up with siblings will be familiar with the discussions at the dining table: who gets the first portion, who gets the biggest piece of meat – and who gets to take a second piece of cake during the afternoon snack? Sharing can always lead to conflict – not least because everyone at the table has a different understanding of fairness: should everyone get the same portion or should factors such as age, appetite or punctuality be taken into account?

Fair or unfair?

The issue of fairness also plays a major role in later life – and often continues to be a question of who gets how much of something. "Unfair," complains the student to the teacher for only giving him a D in French class. "Unfair," shout hockey fans as the referee disallows a disputed goal. "Unfair," says the employee when she learns that her colleague earns significantly more.

We find it unfair when we do not receive something we have earned. In contrast, we consider something to be fair when there are clear rules for distribution and everyone acknowledges them. The student with the D in French will probably stop complaining when he realizes that he didn’t pass any of his exams. The angry hockey fans will fall silent upon watching the slow-motion replay: the puck was clearly off-target. And the employee who felt she was unfairly treated is told by her co-worker over coffee that the raise was due to a costly training course. Student, hockey fan or employee: it is clear to all three that the rules were followed and fairly distributed, whether it be grades, goals or wages.

In the second pillar, i.e. occupational retirement provision, the topic of fairness has also been increasingly under discussion recently: is the second pillar fair, are there clear, generally accepted rules for distribution and are they being adhered to? To answer this question, it is worth taking a look at the objectives and rules of the Swiss pension system with its three pillars. In the following, we will focus on the first two pillars.

Fairness in the first pillar: everyone saves for everyone

When the Swiss legislature created the AHV and thus the first pillar of the social security system in 1947, the principle of “Everyone saves for everyone” applied. The intention was for the contributions of those in work to provide a good retirement for pensioners, the contributions of high earners to help finance the retirement provision of those worse off and the contributions of the healthy to help the disabled and protect widows and orphans from hardship. Hence fairness in the first pillar means: those who have enough give to those who need support. In the end, everyone is protected and has enough to live on in old age or illness. To use a food analogy: everyone brings an ingredient for the soup, and afterwards they scoop themselves a bowl from the big pot meant for everyone. In the first pillar, fairness therefore means that people's income differences are partially compensated for by redistribution – ensuring that everyone has enough in old age.

Fairness in the second pillar: my money remains my money

As the second pillar of the Swiss pension system, occupational retirement provision has been in existence since 1985. Its underlying idea is quite different: in principle, everyone saves for themselves here and fairness means that I can also use the paid-in capital for myself. The aim is that, together with the first pillar/AHV, I get to maintain my accustomed standard of living in old age. I pay my saved money into the pension fund, but it still belongs to me and I don't have to give any of it to anyone else, because I'm already doing that via the first pillar. To put it another way: in the second pillar, each contributor bakes their own cake and can eat it after retirement. The size of the cake depends on the contributions paid and the return generated. Depending on the return, there is chocolate icing on top and the conversion rate determines how big the individual pieces of cake are. In principle, I don't have to share my cake with anyone.

However, the occupational retirement provision system is becoming increasingly unbalanced. The benefit promises of the past can no longer be kept and the income of actively insured is partly used for the pensions of those who have retired. That means I can't have my cake to myself anymore: there’s always a couple of strangers’ forks on the plate. Is this fair? What are the reasons for this redistribution?

Learn more about this in our article “Fairness rather than redistribution in the second pillar. Part 2: What is going wrong in occupational retirement provision – and what are the reasons?”

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