Redistribution in the 2nd pillar – calculate your pension loss
Redistribution does not only occur in the OASI (AHV/AVS) state pension system. Funds are redistributed in occupational pension schemes too. In 2019, 7.2 billion francs were transferred from active contributors to pensioners. There is nothing to indicate that this unsatisfactory practice is going to end any time soon. What does this mean for people in Switzerland?
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In a pension system, redistribution means that people are entitled to a higher or lower pension than expected based on the contributions made during their years of active employment. This is how the first pillar (state pension system) works, for example. The contributions made by today’s employees are passed straight on to pensioners. In other words, the young people of today fund the older people of today. This is known as a pay-as-you-go system.
How does this affect me?
In the first pillar, redistribution from the working population to retired people or from higher earners to lower earners is intentional. However, the same cannot be said for the second pillar. In this case, the pension funds are organized according to the capital-funded system. This involves employees saving for their own retirement with the help of their employer. When they retire, the accumulated savings are converted to a pension for life. Factors used in the calculation of the pension are statistical life expectancy, the financing of survivors’ pensions and long-term interest rate forecasts.
Younger generations lose out
However, increased life expectancy and lower interest rates have caused pension funds to become unbalanced. Workers receive lower returns than their capital actually earns over the course of a year. In 2019, 7.2 billion francs were transferred in this way from active contributors to pension beneficiaries. This is tantamount to expropriation, which goes against the principles of this pension system and puts the younger generation at a disadvantage.
What can I do about redistribution?
The matter of redistribution in the second pillar is still receiving little attention from the general population. But without political intervention, the income of today’s active population will be much lower after retirement. For this reason, the third pillar of the pension system – the voluntary private pension – is becoming increasingly important. The sooner you start planning your retirement, the greater the benefits in old age.
This article was first published on 15.03.2017