2020 Reform of old-age pension system bodes disaster for AHV

echo interview with Petra Gössi, National Councillor and President of Switzerland's Liberal Democratic Party (FDP)

Frau Gössi, you're in a traditional Swiss dress and you've agreed to talk to us about old-age provisioning in the Federal Parliament building during the summer session. Is there a connection?

Not at all. There's a simple explanation: Once every legislative term, we stage a day of traditional dress styles. So today, I'm wearing a traditional costume from Canton Schwyz.

To get to our topic: How high do you think the retirement age will be when you begin drawing your pension?

It'll be substantially higher than it is today and more flexible so that people can make their own decisions about when to retire. Moreover, it'll be a good deal higher if the 2020 Reform of old-age pensions comes into force. By expanding the AHV, the next reform will turn to be even more expensive.

The FDP and broad sections of the business community have rejected parliament's plans to introduce the 2020 Reform of the old-age pension system. Is the status quo better than the planned Reform?

We don't need a sham reform, but a real one. The 2020 Reform of the old-age pension system should secure the financing of the AHV, but this is the very goal it doesn’t achieve. Instead of restructuring the AHV, it has developed it further, a fact which actually puts the whole system at risk. Raising AHV pensions by CHF 70 is tantamount to strengthening the first pillar. This means that the 2020 Reform of old-age provisioning is stoking the flames that will eventually engulf the AHV: In the long run, this will end in disaster. As of 2027, we'll already be running a deficit of a billion Francs, and by 2035 this will have increased by as much as seven billion a year. We'll no longer be able to finance a deficit like this. Ruining instead of restructuring: The 2020 Reform won't achieve its main goal at all.

The 3-pillar system combines public and private provisioning. The 2020 Reform is supposed to make it fit for the future. What's gone wrong in your view?

Firstly, the rearrangement of the first and second pillars. The 2020 Reform weakens the second pillar and strengthens the first without ensuring that the latter is on a sustainable financial footing. This undermines the whole 3-pillar structure of our old-age provisioning system. The original goal has been lost, namely to secure the long-term financing of the first and second pillars. The 2020 Reform simply shifts the problem onto the young generation. So it's not a real reform at all.

In election year, the Christian Democratic Party (CVP) decided to ally itself with the unions and adopt a watered-down version of the AHVplus Initiative. For its part, the left-wing faction agreed to support the CVP's drive to raise pensions for married couples. The gifts promised during election year could no longer be withdrawn even though it's unclear how they're going to be funded. So the two parties did some horse-trading at the expense of the AHV, which they couldn't undo afterwards without losing facing politically.

It's often said that the pact between the generations no longer works. What does this need to look like for the FDP to support a reform of old-age provisioning?

We have to revisit this contract because, as you say, it's no longer functioning properly. The 2020 Old-Age Provisioning Reform clearly demonstrates this. It's unjust for the sole reason that today's retirees won't receive the 70 Francs. Admittedly, lowering the conversion rate won't affect them, but the hike in in value-added tax will. Moreover, it's not fair in my view to persuade 45-year-olds to vote yes by promising them a 70 Franc increase in their pensions when they eventually retire. I don't understand why a 20-year transitional generation shouldn't have to put up with lowering the conversion rate in the mandatory part of the pension fund. And the biggest injustice of all: Although the members of the young generation up to 45 will receive 70 Francs more in AHV payments, they will still have to accept larger pay-packet deductions, an increase in value-added tax and a lower conversion
rate. The youngsters are carrying the heaviest load here. This is particularly unacceptable since, as of 2027, it will be the young generation who once again have to foot the bill for refinancing the AHV. A contract between the generations has be structured equitably and not in a way that places the main burden on the shoulders of younger people.

The FDP and trade associations object to raising the AHV pension by 70 Francs and the Young Socialists to raising the retirement age for women to 65. Is too much ideological thinking getting in the way of a solution here?

I don't think so. The majority of voters believe that the retirement ages for women and men should be aligned. Furthermore, we've already submitted several different compromise proposals. For example, we've suggested abolishing the coordination deduction, which would mean more attractive pensions for part-time workers. Union leader Rechsteiner called for such a move in the Swiss Council of States and we proposed its introduction instead of the 70 Franc measure. The leftists, however, turned a deaf ear to compromises and forced through the damaging and unjust 70 Francs idea.
This is yet another major drawback of the 2020 Reform: At the end of the day, it'll be the poorest who'll be left with the least amount of money in their pockets because the 70 Francs will be offset against the supplementary benefits received. This is not even a zero-sum game because AHV pensions are subject to tax and supplementary benefits are not. And because the poorest, too, will have to pay higher value-added tax, they'll end up with less money. It's outrageous to set in motion a reform of old-age provisioning where the young and the poorest are taken for fools. Exactly the left-wingers, who never tire of drawing attention to their strong social consciences, support this reform.

Does the FDP have a plan in case the voters reject the Reform?

First, we want to put the AHV on a secure footing. We intend sticking to our policy of a retirement age of 65 for all. This will generate 1.2 billion Francs per year for the AHV coffers. Moreover, by raising value-added tax at the same time, we can also ensure sound financing. In a separate bill, aimed at the second pillar, we will need to lower the conversion rate. To compensate, we plan to lower the coordination deduction. By doing this, we can help part-time workers, above all women, to save more through the second pillar. The FDP is not against a reform of the old-age provisioning system. But what we want is a reform worthy of the name.

Numerous trade associations in Westschweiz support the reform. Is this the beginning of a new language divide in Switzerland?

I don't think so. If the trade associations in Westschweiz support the 2020 Reform, it's probably because it's in their own interests to do so. This is how non-government organisations work. It's not an association's main task to advocate sound solutions for the whole of Switzerland. Many trade associations definitely support a lowering of the conversion rate, which they would definitely get with the passing of the 2020 Reform. I can understand why they're not interested in solving the problems of the future. However, this has nothing to do with a new language divide.

Politics in the Swiss Confederation are based, among other things, on the oft-quoted ability to reach sound compromise solutions. Is there sufficient trust between political protagonists these days to restructure the old-age pension system on a solid foundation?

Of course, fundamentally, the trust does exist but this is often overlaid by all the rhetoric out there coming from individual pressure groups. Politically speaking, the problem lies elsewhere: These days, parliamentary bills are too long and too complex – we need to do something about this. Just to understand the mechanics of the AHV alone isn't easy. When you fold in in the complexities of the second pillar, the whole business gets overloaded. Many of our citizens get lost in all the details. People tend to reject new things if they can't assess what their impact will be. I understand this completely. Additionally, in the age of social media, politicians need a clear profile. Consequently, finding common ground for a compromise sometimes takes a backseat. This doesn't have anything to do with the topic of old-age provisioning but rather represents a general trend in politics.

Largely because of the overly high conversion rate in the second pillar, it's the salary and wage earners who are financing retirees' pensions these days. The 2020 Reform intends reducing the rate to 6%. Aren't we doing the pension funds a big favour, if the reform fails at the ballot box?

Nobody disputes the need to lower the conversion rate. But if a hasty, half-baked reform leads to an even worse situation in a couple of years, wouldn't it be better to wait a couple of months? Many people say "yes" to the 2020 Reform because then the lowering the conversion rate would be a done deal. But politics can't be a matter of short termism. The very nature of old-age provisioning demands long-term thinking. It is, by definition, a generational project.

The rest of the world envies Switzerland for its tried and tested three-pillar system. What needs to happen to ensure this structure survives into the future?

A reform is necessary. But not one that begins with playing one pillar against the other. This is the main reason why we're against the 2020 Reform. We need an unequivocal strengthening of the individual pillars and not steps towards a standard or state pension. This is what the unions want, but we don't. Should the AHV one day prove to be no longer financially affordable, then we'll have to draw money from the mandatory part of the pension funds. There's no other way to finance the AHV. So I'm convinced that the 2020 Reform will spell the end of the three-pillar system. There are even certain trades unionists who openly admit that the 2020 Reform will create a precedent for subsequent reforms and the weakening of the second pillar.

Isn't there a danger that the interest rate environment combined with demographic development could unhinge the whole system, especially the second pillar, and we all fall victim to promises of benefits we can't finance?

This is where the pension funds need to examine the books - politicians too. What exactly are we doing with the second pillar? How much additional money do the pension funds need to cover their backs? This question has to be looked at from a political vantage point. It can't be the case that we pay into a system that needs the money just to stay afloat. The money people have saved eventually has to be returned to them.

Don't you see any need for action on the part of the pension funds themselves?

A cost review has to be carried out of the system. And there could very well be a subsequent need to take action. Dissatisfaction at rising costs heightens, of course, when there's talk of cutting benefits. We have to get a handle on these developments.

Should retirees also be called upon to help recapitalise the old-age pension system – or are previously earned pension entitlements a taboo topic?

Politically, a move to cut pensions can't be allowed to happen. A bill that includes a reduction in pension payments stands no chance of success. There isn't majority for such a move. We have to approach this question with the requisite sensitivity. The FDP has clearly stated that restructuring the old-age pension system should be carried out without any cuts in pensions. This is a clear commitment on our part.

Currently, what are the biggest challenges facing the second pillar in your view?

I frequently hear that a major problem in the second pillar is the greater cost employers are faced with in respect to their older employees: Besides having to pay higher wages to their older people, employers also have to make higher pension contributions to this age group. We really need to tackle this problem, especially in regard to those employees over 50. The Social Democrats have rejected our proposals to help solve this problem. In my view, this is the difference between the rhetoric of the left-wingers and what they actually do in parliament. The second major challenge has to do with costs and the related organisational structure of the pension funds.

Do you think the government should promote the third pillar to take pressure off the first and second?

The third pillar gives people the freedom to decide for themselves how much they want to save for their retirement years. And this is a freedom that's very limited at the moment due to the tax-privileged contribution levels we have. There's no doubt it would add greater flexibility to the system if, in future, tax incentives could be adjusted to make it more attractive for people to pay larger sums into the third pillar.

If you could give the pension funds some advice, what would it be?

There's nothing more precious than people's trust. The best way to go in the long term is to maintain transparency. This is how you gain trust. Doing it this way ultimately benefits everyone, not only the pension funds but also the overall economy. A letter at the end of the year is probably not enough. Employees need to become more aware that the second pillar doesn't have the same purpose as the AHV. Those who are familiar with the differences and understand the various systems will be better informed when they go to vote.