The Swiss Old Age Security System in 2020
The regulation of the public pension insurance in Switzerland was introduced in 1946. Following a popular vote in 1972, the concept of the so-called three pillars was incorporated into the Federal Constitution and the Swiss social security system was reformed accordingly. The pillars, each with a goal of their own, are intended to complement each other to ensure old age security. In that sense, the combined pension income of the public and occupational insurances was, upon conception, supposed to cover around 60% of a person’s earned income before retirement. Despite continuous expansions on the scope of the public pension insurance’s benefits, however, its maximum monthly pension has proved insufficient to achieve its intended goal of covering basic living needs for certain individuals with low incomes throughout their careers. In response, pension supplements were – originally as an interim solution – introduced in 1966, then became a central feature of social security and were expanded in 2012 to finance the care of the elderly and persons with disability. As of now, ‘standard protection’ encompasses mandatory insurance in the public pension scheme (also referred to as Pillar I) and predominantly mandatory participation in occupational pension insurance (also referred to as Pillar II), which contributes to preserving people’s accustomed standard of living. ‘Top-ups’ are possible through voluntary insurance within the occupational and private pension schemes on a private law basis. Private pension schemes (also referred to as Pillar III) are tailored to individual needs beyond maintenance of one’s accustomed standard of living. Finally, a ‘minimum’ level of protection is guaranteed by a minimum statutory pension level and income-tested supplementary benefits in the case that a person’s overall old age pension is insufficient.
Standard Protection in Old Age
The old age and survivors’ insurance scheme (Alters- und Hinterlassenenversicherung) is conceptualised as a national insurance for the entire population, and as such covers all persons who live in Switzerland regardless of employment status, and all persons who work in Switzerland regardless of nationality. The scheme is mainly PAYG-financed from (fully tax-deductible) mandatory insurance contributions shared in parity between employees and their employers. These contributions are automatically deducted from an employee’s salary, and owed by the employer to the compensation offices, the primary institutions that administer the scheme. Different contribution rates apply for the self-employed and unemployed. In addition, 20.2% of the scheme is tax-financed out of the general federal budget.
The occupational pension scheme (Berufliche Altersvorsorge) is split into a statutory obligation (Obligatorium) and supplementary component (Überobligatorium, weitergehende Vorsorge). While the former offers both mandatory and voluntary insurance options for certain groups, the latter allows for top-ups for individuals with a higher income. The scheme applies to persons insured in the old age and survivors’ insurance scheme who earn more than an annual salary of CHF 21,330 with one employer. Special rules apply to employed persons with frequently changing or fixed-term employment, while self-employed and employed persons not mandatorily insured may enter the scheme on a voluntary basis. Only the statutory obligation of the scheme, which insures the annual earned income between CHF 24,885 and CHF 85,320 (for reasons of inter-scheme coordination1), is subject to the Federal Act on the Occupational Old Age, Survivors’ and Invalidity Pension Scheme. Consequently, only pension funds that administer the statutory obligation of the scheme have to be registered with the supervisory authority and fulfil the related requirements. The scheme is exclusively funded by (fully tax-deductible) mandatory contributions from employees and their employers, which are automatically deducted from an employee’s salary. In contrast, however, no specific amount of contributions is set by law, and rates are defined in each pension fund’s regulations. Employers are obliged to pay contributions at least equal in amount to the total of all employees’ contributions at a given time. Pension funds are subject to legal regulations regarding the investments of contribution payments, including a minimum interest rate for old age savings.
The supplementary component of the occupational pension scheme (Berufliche Altersvorsorge), the Überobligatorium, is voluntarily offered by pension funds on a contractual basis and insures earned income that exceeds CHF 85,320. The majority of insured people voluntarily join the supplementary component for additional coverage, as, particularly in the case of middle- and higher-income groups, the minimum guarantees of the statutory obligation of the occupational pension scheme along with pensions of the old age and survivors’ insurance scheme usually cannot achieve the intended goal of covering around 60% of a person’s earned income before retirement. Self-employed persons may choose to enter solely the supplementary component, skipping the statutory obligation. Non-mandatory contributions to the occupational pension scheme enjoy a privileged status by law and may be fully deducted from direct taxes.
The private pension insurance (Selbstvorsorge) is split into the so-called Pillars IIIa and IIIb, namely the tied private pension scheme (Gebundene Selbstvorsorge), which is characterised by tax advantages, and the voluntary private pension scheme (Freie Selbstvorsorge), which has no preferential tax treatment. The private pension schemes are optional and fully funded by personal contribution payments. Savings in the tied private pension scheme are allowed only in the forms of tied pension insurance policies offered by insurance agencies, and tied insurance arrangements with bank foundations. These savings are, as the name states, tied, and may only be paid out prematurely for legally defined purposes. In contrast, the various solutions of the voluntary private pension scheme offer more flexibility. Measures in the fields of tax and property policy are designed to encourage saving for one’s pension. More specifically, the tied private pension scheme, which is open to employed and self-employed persons with an income subject to contributions to the old age and survivors’ insurance scheme (thus including persons who live abroad but work in Switzerland), allows for full deduction of one’s contributions from one’s income when paying direct federal, cantonal or communal taxes under certain conditions. The tied private pension scheme is of particular interest to self-employed persons, as they are not mandatorily insured in the occupational pension scheme.
Persons eligible to public pensions of the statutory scheme are guaranteed benefits of at least the amount of the minimum statutory pension level. Persons who had a low salary or no former employment in particular may still, however, end up with an insufficient old age pension as a result of insufficient or no contributions paid to the occupational and private schemes. In such cases, supplementary benefits to the old age and survivors’ insurance scheme (Ergänzungsleistungen zur Alters- und Hinterlassenenversicherung) help achieve the central aim of the public pension system by ensuring coverage of the basic living needs. The supplementary benefits to the old age and survivors’ insurance scheme are thus considered part of the public pension system. These benefits consist of an annual benefit and the reimbursement of costs associated with illness or disability. The latter is of particular importance as with increasing age, long-term care and stays in a nursing home or hospital may become necessary and can easily exceed the available means. To qualify for supplementary benefits (in the context of old age security), a person has to be a recipient of an old age pension from the old age and survivors’ insurance scheme with a domicile and habitual residence in Switzerland. As benefits are supplementary in nature, they can only be paid if all other social insurance benefits (such as the invalidity insurance) have been exhausted, and are means-tested based on income and net capital. Social assistance measures exist outside of the pension system, but are hardly relevant to old age security anymore as supplementary benefits now cover many costs formerly covered by social assistance, particularly in the domain of long-term care.
1 Inter-scheme coordination in this case refers to the relationship between the old age and survivors’ insurance scheme and the occupational pension scheme. More specifically, the entry threshold in annual salary, the coordination deduction, the minimum as well as maximum statutorily insured income of the occupational pension scheme use the (maximum annual) public old age pension as a calculation basis. These calculations ensure that the occupational pension scheme only insures income not already insured by the old age and survivors’ insurance scheme. The entry threshold (CHF 21,330 in 2020) and the minimum statutorily insured income (CHF 24,885 in 2020), and thus the coordination deduction, used to be of identical value. As part of the first revision of the occupational pension scheme in 2005, the entry threshold was lowered as a compromise, hence the discrepancy in value.