The causes of redistribution
In the past 37 years, the underlying conditions have changed fundamentally and therefore – in a somewhat creeping manner – ever greater redistribution is also taking place, including within the savings share of occupational retirement provision. This means that the income from my saved capital, which actually belongs to me, is partly redistributed to others. And my capital 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 significantly fewer children are being born. As a result, the ratio between those in employment and those claiming a pension is changing. According to the Federal Statistical Office, in 1991 there were 28 pensioners for every 100 people in work, but 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 1985, the year in which mandatory occupational retirement provision was introduced, a 65-year-old man still had an average life expectancy of 15 more years; today it has increased to 20 years. The money saved must therefore cover a longer period of time.
- In addition, the founders of occupational retirement provision assumed that the pension assets could earn interest at an average of 5 percent over the long term. But this has not been the case for many years: Interest rates are currently so low that pension capital is growing significantly slower than originally planned.
- Both factors, the higher life expectancy and the lower interest rate, mean that the statutory conversion rate of 6.8 percent for the mandatory part is notably too high. This means that the saved capital is no longer sufficient for the longer pension period.
This all creates a funding gap for the pension funds. In order to be able to pay out the promised pensions, the pension funds have to shift, or redistribute, some of the investment income from those in work to pensioners. In addition, the pension funds 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 those in gainful employment is also increasing. The current conversion rates are too high because they assume a shorter life expectancy and higher investment income. 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 pensioners – 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.