Pension reform – incentives to work longer

With regard to securing old-age provision, there is a complete blockade of reform. It is obvious that the long-term stability of Swiss old-age provision can only be achieved with increasing working life. But despite this, the government and parliament are primarily counting on the additional burden on workers, declaring pensions to be sacrosanct and even trying to increase them as part of “compensation measures”. What’s going on here?

Some politicians argue that increasing the working life does not help because the elderly cannot find jobs. We think that’s wrong. Today, Switzerland does not have too many but too few qualified workers. Aging exacerbates labor shortages by increasing the total population relative to those employed.

Older people find it difficult to find new jobs only to a limited extent because of their age. More important are various regulations that make them expensive for their employers, and their short “remaining term”: it is often not worthwhile for employers to hire and train people who will be retiring in just a few years. A cleverly designed increase in working life would therefore defuse the labor market problems of the elderly.

Retirement provision as an implicit immigration tax

The real reason for the reform blockade is likely to be one that has been neglected and concealed so far: Today’s old-age provision is a machine for redistributing foreigners without voting rights to Swiss citizens who are entitled to vote. The current pension system brings about a strong redistribution from young to old – in the AHV directly through the pay-as-you-go system, in the second pillar indirectly through excessive pensions as a result of excessive conversion rates. This results in a redistribution from members of families with people of retirement age to members of families without people of retirement age.

Within most families there is a well-functioning intergenerational financial equalization system. This occurs primarily in the direct line of grandparents, parents and children. High pension payments mostly come to the children or grandchildren in one form or another, be it through grants, gifts, inheritance or because the elderly have less need for support.

Thus, Swiss pension policy brings about redistribution between three groups of individuals: pensioners, workers with parents entitled to a Swiss pension, and workers without parents entitled to a Swiss pension. Hundreds of thousands of immigrants work in Switzerland who do not have parents with Swiss pension entitlements. They are net contributors, but have no voting rights and have little political weight.

On the other hand, pensioners, as the main beneficiaries of high pensions, have a high political weight. Most were born Swiss or immigrated and naturalized a long time ago. With the high level of immigration, the number of non-voting employees without pensioner parents is growing, and with increasing life expectancy the number of voting pensioners and thus also the voting employees with pensioner parents is growing.

The redistributive effect of a policy with high pensions and high contribution rates runs systematically from the often voting-free working people without pensioner parents to the mostly voting pensioners and their children. In other words, today’s pension system is an implicit immigration tax.

So today’s pension policy, which at first glance seems unreasonable, is not that unreasonable, at least from the point of view of those entitled to vote. The redistribution effect also explains why the reform blockade specifically affects Swiss pension policy after the turn of the century. The objection that the voters did not see through the redistribution mechanism is irrelevant. Because they don’t have to. You can feel it in your wallet.

Set the right incentives

The proposals for raising the retirement age that have been intensively discussed in politics, the public and academia are all associated with a reduction in the redistribution from immigrants to nationals and thus put many voters in a worse position. As a result, they hardly stand a chance with the electorate – as long as either the immigrants are not given the right to vote much more quickly or the current implicit taxation of immigrants through the pension system is replaced by an explicit and more efficient immigration tax.

The increase in working life that is necessary for the economy as a whole therefore calls for a reform that puts both young and old, and thus immigrants and nationals, in a better position. We therefore advocate the “Safe AAA” pension reform model – securing old-age provision through voluntary gainful employment in old age thanks to incentives. It makes work more attractive in old age and thus increases the working life without any compulsion. It consists of three elements:

First: Deferred pension with contribution discount. Pension deferral should not be rewarded with higher pension payments in the distant future, as is the case today, but with a fair discount on contributions to the first and second pillars. Because deferring retirement increases the number of contribution years remaining and decreases the number of retirement years, the rebates can be hugely attractive. For example, employees who decide to retire at 60 “only” after 67 could largely waive the employee and employer contributions from 61 to 67.

Second: Partial taxation of old-age work. Taxes and duties on income from work over a certain age (e.g. 67) are to be sharply reduced, which would give retirees effective incentives to continue working.

Third: Additional tax revenue for old-age provision. Under the proposed conditions, many older people would voluntarily work far more than they do today and thus pay far more overall income, property and value added tax than before. This additional income should not flow into the general treasury, but specifically into old-age provision.

While previous pension reform proposals aimed at reducing the redistribution from young to old and thus the redistribution from immigrants to natives and a “redistribution of the pie”, the “Safe AAA” model is aimed at “enlarging the pie” by reducing the incentives for old-age work improved. Those who work longer thanks to the reform are not losers but winners because they work longer voluntarily. They also contribute to the stability of the entire pension system because they pay more taxes and duties thanks to their extra work. The model thus benefits everyone: the old and the young, those who work long and short hours, as well as residents and immigrants.

Reiner Eichenberger is Professor of Theory of Fiscal and Economic Policy at the University of Friborg and Research Director of Crema; Patricia Schafer is a diploma assistant and doctoral candidate at the chair for the theory of financial and economic policy at the University of Freiburg.