COVER BASIC
NEEDS
COVER BASIC
NEEDS
COVER BASIC
NEEDS
COVER BASIC
NEEDS
The first pillar
The primary objective of the Swiss pension system is to offer its beneficiaries financial security throughout their adult life.
Many people believe that the pension system is only there to guarantee income at retirement. This is indeed one of its central objectives, but by no means its only one.
Within the Swiss pension system each pillar contributes cumulatively to our financial security.
How does the first pillar contribute to our financial security?
The first pillar contributes to our financial security in four ways:
How does it work ?
The first pillar is the state-controlled scheme, the equivalent of the social security schemes of other countries. It is known as old-age and survivors’ insurance, its French acronym is AVS. It is compulsory for the whole population from the age of 20, INCLUDING THOSE THAT DO NOT EARN AN INCOME. The contribution represents roughly 10% of gross income for employees, half of which is paid directly by the employer. For students and those that are not employed, a minimum contribution of CHF 496.- per year is due (in 2020). In order not to be heavily penalized at retirement, it is imperative to start contributing to an AVS plan from January 1 following ones 20th birthday.
In 2020, the maximum pillar one pension benefit is capped at CHF 2’370.- per month. But BE AWARE, there are strict conditions that need to be respected in order to receive the maximum benefit. It is estimated that only 30% of beneficiaries receive the maximum AVS pension, the average person receives 15% less (between CHF 2’000 and 2’030.-).
It is also important to note that the individual pension benefits of a married couple cannot exceed 150% of the maximum amount (2’370 * 150% = CHF 3’555.-). This means that a married couple who should each individually benefit from a maximum pension of 2’370.- at retirement (2 x 2’370 = CHF 4’740.-) will only receive CHF 3’555.-, a “loss” of 25%.
In 2020, for those who contribute for 43 or 44 years, regardless of the amount, the minimum pension is CHF 1’185.-
Two criteria are used to calculate the AVS pension benefit, the number of years a person has contributed for and their average annual income over that period :
1) To receive the maximum pension benefit, men must contribute over a period of 44 years and women 43 years. Missing years are heavily penalized at a rate of 1/44 for men and 1/43 for women.
This beneficiary will receive CHF 1’943.- per month from their first pillar.
Each missing year is therefore penalized by around 2.3%.
2) The average annual income is the second criteria which plays a role in the calculation of the pension benefit. It is equal to the average annual income received during the contribution period. Additional contributions are taken into consideration for parents that stay at home to raise their children.
To benefit from the maximum pension benefit in 2020, the average annual income must be equal to or greater than CHF 85’320.-
In short, this means that those that earn less than an average of 85’320.- per year during their professional career, cannot claim a maximum AVS pension benefit.
Since AVS is a social insurance, the penalty for an annual income below 85’320.- is less severe than the penalty for missing years.
Average annual income over 43 (women) or 44 (men) years:
The example demonstrates a penalty of 5.6% per CHF 10’000.- below the average annual income of 85’320.-
His average annual income is roughly CHF 20’000.- less than 85’320.-, so we can deduct 11.2% of the maximum pension:
2’370 (maximum pension) – 11.2% = 2’105.-
This would be the actual pension if he had contributed for 44 years.
This beneficiary has only contributed for 36 years, so he is missing 8 years of contributions (44 – 36 = 8), so we must reduce his benefit by 82% (36/44 = 82%):
82% of 2’105.- = CHF 1’726.-
This beneficiary will receive CHF 1’726.- per month from their first pillar.
The calculation is simple for single people, without children. Things get more complicated for married, widowed or divorced people, as well as for people who have children. For a precise calculation, one can request an extract from one’s AVS fund, known as “un extrait de compte individuel” (CI) in French.
* The assessment is free and gives you an overview of your first, second and third pillar benefits in the event of retirement and loss of income in the event of illness or accident. It also gives you the amounts that are available if you wish to become a homeowner, start your own business or if you are going to leave Switzerland.
How is the first pillar funded ?
The first pillar is a social insurance which works on a “pay-as-you-go” principle. This means that the taxes taken from the current working population are immediately used to finance the pension benefits of the current retired population.
Unfortunately the “pay-as-you-go” principle is putting increased pressure on the Swiss pillar one system, because the number of retirees is increasing while the number of active workers is decreasing. The government must therefore continually find new sources of funding to support the first pillar.
Today the contributions of the active workers are only capable of financing 72% of the annual expenses of the AVS, which represent roughly CHF 45.- billion per year. The remaining 28% come from four sources:
– VAT receipts
– tobacco and alcohol taxes
– taxes on casinos
– the general resources of the Swiss Confederation
The second pillar also faces sustainable funding issues, but for other reasons. It is therefore important to follow the developments in the Swiss pension reform projects such as « Prévoyance vieillesse 2020 » (retirement planning 2020) and other government initiatives.