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The Swiss multi-pillar pension system : triumph of common sense?

Author

Listed:
  • Queisser, Monika
  • Vittas, Dimitri

Abstract

The authors provide a detailed study of the Swiss pension system, analyzing its strengths and weaknesses. The unfunded public pillar is highly redistributive. It has near universal coverage, a low dispersion of benefits (the maximum public pension is twice the minimum), and no ceiling on contributions. Low-income pensioners receive means-tested supplementary benefits. Payroll taxes are low, but government transfers cover 27 percent of total benefits. Total benefits amount to 9.1 percent of GDP, equivalent to 15.2 percent of covered earnings. The funded private pillar was made compulsory in a defensive move against the relentless expansion of the public pillar. The compulsory pillar stipulates minimum benefits in the form of age-related credits, a minimum interest rate on accumulated credits, and a minimum annuity conversion factor, aimed to smooth changes in interest rates over time. Low-income workers are not required to participate in the second pillar. The first and second pillars as well as supplementary benefits are admirably integrated. Company pension plans are free to set terms and conditions in excess of these minimums, and most offer benefits exceeding obligatory levels. The second pillar has accumulated large financial resources, equivalent to 125 percent of GDP. Investment returns have historically been low, but a shift in asset allocation in favor of equities and international assets has increased reported returns in recent years. The third (voluntary) pillar covers self-employed workers and others not covered by the second pillar. It plays a rather small role in the system. Many of the positive features of the Swiss pension system are not due to some grand original design but are instead the result of periodic revisions. In large part they reflect the collective common sense of the Swiss people in voting for stable and fiscally prudent social benefits. However, the Swiss system also has some weaknesses. As in many other countries, the public pillar faces a deteriorating system dependency ratio, due to demographic aging and a large increase in disability pensions. The second pillar is fragmented (more than 4000 funds with affiliates), lacks transparency, and has achieved low investment returns.

Suggested Citation

  • Queisser, Monika & Vittas, Dimitri, 2000. "The Swiss multi-pillar pension system : triumph of common sense?," Policy Research Working Paper Series 2416, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2416
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    References listed on IDEAS

    as
    1. Vittas, Dimitri, 1997. "The Argentine pension reform and its relevance for Eastern Europe," Policy Research Working Paper Series 1819, The World Bank.
    2. Vittas, Dimitri, 1998. "Regulatory controversies of private pension funds," Policy Research Working Paper Series 1893, The World Bank.
    3. Vittas, Dimitri, 1993. "Swiss Chilanpore : the way forward for pension reform?," Policy Research Working Paper Series 1093, The World Bank.
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    Citations

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    Cited by:

    1. Marie Vavrejnová & Eva Belabed & Karl Wörister, 2004. "Pension Reform in the Czech Republic: Present Situation and Future Prospects (A Comparison with Austria)," Prague Economic Papers, University of Economics, Prague, vol. 2004(3), pages 237-259.
    2. Anderson, Karen M., 2008. "The politics of multipillar pension restructuring in Denmark, the Netherlands and Switzerland," Discussion Papers, Research Unit: Inequality and Social Integration SP I 2008-205, Social Science Research Center Berlin (WZB).
    3. Vittas, Dimitri, 2000. "Pension reform and capital market development -"feasibility"and"impact"preconditions," Policy Research Working Paper Series 2414, The World Bank.
    4. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save Retirement May Backfire," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.05, Université de Lausanne, Faculté des HEC, DEEP.
    5. Christian Keuschnigg & Mirela Keuschnigg & Christian Jaag, 2011. "Aging and the Financing of Social Security in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(II), pages 181-231, June.
    6. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save for Retirement May Backfire," University of St. Gallen Department of Economics working paper series 2005 2005-09, Department of Economics, University of St. Gallen.
    7. Monika Bütler & Federica Teppa, 2005. "Should You Take a Lump-Sum or Annuitize? Results from Swiss Pension Funds," University of St. Gallen Department of Economics working paper series 2005 2005-20, Department of Economics, University of St. Gallen.
    8. Florian Zainhofer, 2007. "Life Cycle Portfolio Choice: A Swiss Perspective," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(II), pages 187-238, June.
    9. Conny Olovsson, 2014. "How Does a Pay-as-you-go System Affect Asset Returns and the Equity Premium?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 131-149, January.
    10. Vittas, Dimitri, 2003. "The role of occupational pension funds in Mauritius," Policy Research Working Paper Series 3033, The World Bank.
    11. Monika BÜTLER & Olivia HUGUENIN & Federica TEPPA, 2004. "What Triggers Early Retirement ? Results from Swiss Pension Funds," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.04, Université de Lausanne, Faculté des HEC, DEEP.
    12. Impavido, Gregorio & Musalem, Alberto R. & Vittas, Dimitri, 2002. "Contractual savings in countries with a small financial sector," Policy Research Working Paper Series 2841, The World Bank.
    13. Monika Bütler & Federica Teppa, 2007. "The Choice between an Annuity and a Lump Sum: Results from Swiss Pension Funds," NBER Chapters,in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1944-1966 National Bureau of Economic Research, Inc.
    14. Vittas, Dimitri, 2002. "Policies to promote saving for retirement : a synthetic overview," Policy Research Working Paper Series 2801, The World Bank.
    15. Opielka, Michael, 2008. "Grundeinkommen als umfassende Sozialreform: Zur Systematik und Finanzierbarkeit am Beispiel des Vorschlags Solidarisches Bürgergeld," Edition HWWI: Chapters,in: Bedingungsloses Grundeinkommen und Solidarisches Bürgergeld - mehr als sozialutopische Konzepte, pages 129-175 Hamburg Institute of International Economics (HWWI).
    16. Horneff, Vanya & Kaschützke, Barbara & Maurer, Raimond & Rogalla, Ralph, 2014. "Welfare implications of product choice regulation during the payout phase of funded pensions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 13(03), pages 272-296, July.
    17. James,Estelle & Smalhout, James & Vittas, Dimitri, 2001. "Administrative costs and the organization of individual retirement account systems : a comparative perspective," Policy Research Working Paper Series 2554, The World Bank.
    18. Monika Bütler & Stefan Staubli, 2010. "Payouts in Switzerland: Explaining Developments in Annuitization," University of St. Gallen Department of Economics working paper series 2010 2010-06, Department of Economics, University of St. Gallen.
    19. Anna Zalewska, 2005. "Home bias and stock market development. The Polish experience," The Centre for Market and Public Organisation 05/136, Department of Economics, University of Bristol, UK.
    20. Bütler, Monika & Staubli, Stefan & Zito, Maria Grazia, 2008. "The Role of the Annuity's Value on the Decision (Not) to Annuitize: Evidence from a Large Policy Change," CEPR Discussion Papers 6930, C.E.P.R. Discussion Papers.
    21. Monika BÜTLER, 2003. "Mandated Annuities in Switzerland," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.08, Université de Lausanne, Faculté des HEC, DEEP.
    22. Niklas Potrafke, 2007. "Social Security in Germany: A Prey of Political Opportunism?," Discussion Papers of DIW Berlin 677, DIW Berlin, German Institute for Economic Research.

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