The causes of redistribution
In the past 35 years, the underlying conditions have changed fundamentally and therefore – in a somewhat creeping manner – ever greater redistribution is also taking place within the share of savings. This means that the income from my capital, which actually belongs to me, is partly redistributed to others. And my cake for old age is not growing as originally intended, but remains smaller than it should be. What are the causes of this redistribution?
The population in Switzerland is aging, while at the same time having significantly fewer children. As a result, the ratio between those in employment and those claiming a pension is changing. According to the Federal Statistical Office, there were 28 pensioners for every 100 people in work in 1991; this number had already reached 35 pensioners by 2019. The Federal Office forecasts that there could be as many as 50 pensioners per 100 people in work by 2040.
In 1960, a 65-year-old man still had an average life expectancy of 13 years; today it has increased to 20 years. The money saved must therefore cover a longer period of time, but the existing guarantees and conversion rates do not reflect reality. Interest rates have been so low for years that pension capital is no longer growing as originally planned. The conversion rate of 6.8% for the compulsory part set out in the law is too high. This means that the saved capital is not sufficient for the longer pension period. And due to high volatility and the persistently low interest rate environment, the returns that can still be earned on the capital markets are also increasingly uncertain. Going back to our cake example: the high conversion rate means that I receive too large a slice of the cake, which means that the cake is eaten up faster. The low yield creates a situation where the chocolate layer on my cake gets thinner and thinner.
This all creates a funding gap for the pension funds. In order to keep their unrealistic promises of payouts to pensioners – which are based on old assumptions – they have to shift, or even redistribute, some of the investment income from those in work to pensioners. In addition, the joint foundations are forced to reduce the conversion rate on non-mandatory retirement assets. As a result, companies with high wage levels and generous pension fund benefits co-finance other companies that have low wage levels and offer only minimum benefits to their insured.
The problem with redistribution is that the money does not stay where it belongs
Because we are all living longer, pensioners’ retirement savings capital must last longer and longer. In addition, the number of pensioners compared to active insured is also increasing. The retirement savings capital pot must therefore be sufficient for more and more people over an ever longer period of time. The current conversion rates are too high because they assume a shorter life expectancy. This creates a funding gap. In order to plug this gap, today's working population will have to forgo part of the returns on their retirement savings capital for the benefit of those claiming a pension – this leads to unintentional redistribution.
In order to ensure that today's working people, and above all our children, can also rely on the second pillar, it must be modernized in a sustainable manner.