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Is the Swiss retirement age still appropriate?

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Is the Swiss retirement age still appropriate?

The Swiss economy is recovering from the Covid pandemic and inflation has returned to the range required for price stability. However, the Swiss National Bank has insisted that it is too early to consider any tightening of monetary policy. In the light of that, GianLuigi Mandruzzato examines the proposed Swiss pension reform.

With Swiss monetary policy on autopilot, the focus has shifted to fiscal policy, including the pension system. There has been much discussion recently about the Federal Council’s proposed reform of the public Old Age and Survivors’ Insurance (OASI). The aim is to consolidate the first pillar of the Swiss pension system in the face of the worsening financial imbalances, a trend that will intensify with rising population’s longevity. The Federal Council has proposed raising the retirement age for women to 65 to reduce OASI expenditure and increasing the VAT rate to increase revenues. The retirement age of women would match that of men and the first cohorts of female workers affected would benefit from some compensation measures.

However, public opinion polls show a majority against the pension reform and it seems likely that, as in 2017, this attempt to consolidate the pension system will also be rejected if put to a referendum. Paradoxically, this may not be bad news.

The current reform proposal of the OASI is problematic in that it does not solve the underlying problem but merely contains the financial costs over the next decade, too short a horizon compared to demographic trends whose effects unfold over several decades. The reform would reduce the OASI cumulative deficit to 2031 by about CHF 10 bn compared to the CHF 23 bn estimated by the Federal Social Insurance Office under current legislation.

A more efficient and fairer solution would be to universally increase the retirement age and incentivise voluntary delayed retirement. Since the OASI was created in 1948, the Swiss retirement age has been 65 years even though the life expectancy at birth has risen by more than 15 years and now approaches 84 years. According to the United Nations, it will increase by about one year every decade for the rest of the century. At 60 years of age, life expectancy in Switzerland exceeds 25 years according to estimates by the Legatum Institute.

The relatively low retirement age and increasing life expectancy mean the replacement rate for Swiss workers is almost 20 percentage points below the OECD average. Raising the retirement age would increase pensions supporting welfare and personal consumption throughout the life cycle. For every year that the retirement age is raised above 65 years, total pension benefits, including the compulsory occupational pension plans, would increase by more than 5%. Less need for extra savings to supplement the pension income and lower taxation, for both households and corporates, would benefit private consumption and enhance the competitiveness of Swiss corporates.

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