According to a new calculation by economists, the pension promises in the AHV exceed the income under current law by over 900 billion francs. The planned AHV 21 reform will reduce this gap by almost a third – primarily at the expense of younger people.
Older people receive massively more AHV benefits than they paid in. The younger generations are the losers.
“The AHV is popular.” That’s what politicians say from left to right. But they usually remain silent about the main reason for the popularity of the social security system: most of the insured take out much more money than they pay in – and this is largely at the expense of subsequent generations. A key component of AHV popularity is the obfuscation of the massive redistribution from young to old and from top to bottom. These cross-subsidizations are so well hidden that the beneficiaries can fool themselves and others into believing that they have fully earned their own pension. Officially, around one eighth of old-age pensioners receive state supplementary benefits, but taking into account all state-mandated subsidies, it is roughly around 60 to 80 percent. In many cases, the hidden subsidy accounts for about half of the AHV pension. No wonder the AHV is “popular”.
Hardly anyone in the Swiss political circus wants to hear all this, let alone say it themselves. Irritatingly, every now and then a few economists disturb the federal church service in Bern. These include Bernd Raffelhüschen from the Research Center for Intergenerational Contracts at the University of Freiburg im Breisgau and a group of economists at UBS. These spoilsports have theirs on Thursday latest bills submitted to the generational balance sheet of the AHV.
Bad checks
The first core finding: The AHV issued unsecured checks for over 900 billion Swiss francs under current law. This means that the pension promises exceed the future AHV income by this amount. In this calculation, future shortfalls in coverage are broken down to today’s present value using a real interest rate of 2.1 percent; a coverage gap of CHF 100 in twelve months would therefore correspond to a present value of around CHF 98 in this calculation.
The result of the calculations is that for a sustainable AHV, reforms must improve the relationship between future income and expenditure by over 900 billion francs. The amount corresponds to the total added value in the Swiss economy within around 15 months. Such reforms would be steep, but doable. This requires, for example, a gradual increase in the normal retirement age to an estimated 68 or an increase in value added tax by 3 to 4 percentage points to 11 to 12 percent.
Hidden redistribution
But the crux of the matter lies in the distributional impact of reforms. The political trend is clear: the more reforms burden young people in particular, the more likely they are to win a majority. In other words, the sooner reforms affect all generations in a similar way, the more unpopular they are. The “fairest” way of treating all generations equally would be to reduce or at least freeze nominal annual pensions – but no politician with an instinct for self-preservation wants to propose this. Number 2 on the list would be raising the retirement age across the board, but that doesn’t win popularity awards either. On the other hand, prescribed additional income (e.g. via additional wage deductions, tax increases or national bank funds) is less unpopular, but such steps primarily burden the young.
Parliament passed an AHV reform last December (“AHV 21”). Above all, this proposal contains an alignment of the retirement age for women with that of men (from 64 to 65) and an increase in VAT. According to the calculations of the economists at UBS and the University of Freiburg, this reform would reduce the sustainability gap of the AHV by around 30 percent – to around CHF 650 billion.
That wouldn’t be so bad as a first step. But the burden of the reform will be borne primarily by the younger generations. According to the calculations, people under 50 pay around CHF 12,000 to CHF 13,000 per capita for this reform, broken down to today’s cash value, while those over 55 have to pay between almost zero and CHF 2,500 (see chart). These numbers represent any future additional charges discounted to today’s present value. The explanation for the additional burden on young people is simple: a 20-year-old may pay the additional VAT for another 70 years, while a 70-year-old will probably only pay the surcharge for an average of around 20 years. One might think that it is only logical and “fair” that the younger ones paid more because they lived longer, but these additional payments subsidize the pensions of the elderly, which are arithmetically too high.
At least “AHV 21” brings a little more intergenerational justice in one respect: by raising the retirement age for women. But it is no coincidence that this point is highly controversial and was also the reason for the left-wing referendum. The people will therefore probably decide this fall at the ballot box.
After me the deluge
The last “reform” of the AHV was even more one-sidedly at the expense of young people: It was part of the company tax/AHV package approved by the people in 2019 and only included additional income for the social system via additional wage deductions and federal subsidies. And it doesn’t take a political genius to make the following prognosis: Future AHV reforms will also hit the young today heavily. The baby boomers will soon be retiring, but politicians are likely to spare this influential generation at the expense of the younger generation.
But that’s how politics works. This essentially reflects society and thus the psyche of the people. “After me the deluge” is a common behavioral model – especially when, thanks to the disguise of the redistribution streams, one can persuade oneself that everything is going “justly”.