Swiss “Pension 2020” Reform to be Settled by Voters

On September 24, the Swiss electorate will vote on a two-part pension reform package known as “Pension 2020.”

Pension 2020 features two parts, which look to increase social security taxes as well as value-added tax (VAT) rates to better fund the system. Each section is subject to vote, but the failure of one element will result in the demise of the other.

As mortality rates rise, populations age, and investment returns decrease, pension systems are feeling the weight of these issues, leading many to seek reform or face insolvency.

Switzerland currently has a three-part pension system, known as pillars. The first is a social security system-funded universal monthly payment, where compulsory deductions from workers’ salaries are used to pay retirees. The second pillar, which is largely used to pay annuities, is a heavily regulated compulsory personal pension funded from salary deductions. The third pillar is an optional private pension. Payments into the three-pillar system are tax deductible. Pension 2020 seeks to make changes to the first two pillars.

One of the adjustments calls for equalizing the retirement age for men and women to 65. For women, it is currently at 64. The 2020 life expectancy is expected to be 88.8 for women and 85.2 for men. Those with smaller personal pensions will have the rules adjusted in their favor as first-pillar payments will increase by CHF 70 per month for single people and CHF 226 for married couples. The much larger raise for married couple is due to criticisms that suggest current payments penalize marriage.

Additional changes would provide retirement flexibility between the ages of 62 and 70, VAT rising from 8% to 8.3% in 2018 (followed by and increase to 8.6% in 2021), and social security taxes rising 0.3% in the same year. Half of the rise in social security tax would be paid directly by the employer.

While the Federal Council, Parliament, and majorities of the Swiss governments’ two chambers voted in favor of Pension 2020, the votes were close. Parliament voted 101-92 in favor, with four abstentions, and the States Council voted 27-18 in favor of 2020.

The political voting decision coincides with the criticism surrounding the reform. Pension 2020 debates range from increases in VATs and the female retirement age to the first-pillar payment increases becoming a step backwards for the system. Political parties against the reform are the Swiss People’s Party and the Liberal Party, which cite unjust penalties for some while also not solving the problem. Parties in favor of Pension 2020 are the Christian Democratic People’s Party and the Socialist Party.