Putting all together
The three pillars system looks like a very complicated one, and in fact it is. But you can’t achieve great results without complexity. I generally like the Swiss system.
Well, I come from Italy. In Italy – the only other pension system I’ve been exposed – you essentially have no choices. You’re forced to follow the inefficient system and can’t do much else. The world of private pensions are as dangerous as you could possibly imagine, with likelihood of an insurance company not going broke before you reach retirement age close to zero.
The US system seems more interesting since it lacks compulsory contributions – as far as I understood – and let you invest as you wish. No protection, no guarantees, a lot of freedom. Well, it may lead to under-contribution and lack of a pension at all (and that’s apparently a common issue in US), but that’s another problem.
Anyway, the factors I consider when evaluating a pension system are the following:
- freedom and flexibility in your contributions.
- transparency and control on your accounts.
- the amount the government is contributing.
- the amount your employer is contributing.
- the amount the system is eating.
- the social fairness.
- the overall complexity of the system.
Let’s evaluate them one by one.
Freedom and flexibility in your contributions
Pillar 1 has no flexibility. Pillar 2 may have some kind of flexibility. Pillar 3 is totally flexible. We score better than Italy here, but I’d like to be really free to do whatever I want, like in the US.
Transparency and control on your accounts
Amazing transparency over Pillar 2 and 3. Very little over Pillar 1.
Zero control over Pillar 1, little control over Pillar 2, something more on Pillar 3 but not enough.
The amount the government is contributing
The government is contributing in several ways: via letting you save taxes on your contributions and via giving you a pension till you die, starting at age 65. Apparently the Swiss pension system is not in good shape thanks to a very high life expectancy, which means the government is contributing too much.
The amount your employer is contributing
Pillar 1&2 eats in my case 29.45% of my insured salary (which is lower than my gross salary, roughly 70% of it). Half of this 29.45% (~15%) is on my employer. It hasn’t to be, since my employer could offer me an inferior Pillar 2 plan, but I’m evaluating my case. 15% of employer contribution is very good for me. Compared to US that’s way above the average. Compared to Italy it’s not. In Italy I remember something like 33%, split 7% on you and 26% on your employer. Crazy.
The amount the system is eating
Pillar 1 is handled by the state. The amount eaten is analized in the social fairness section. Pillar 2&3 are handled by private institutions and they’re not there for charity. Anyway, I don’t experience hi fees or maintenance costs. Main Pillar 2 cost is opportunity cost. Lending my money to the fund at 1% interest when they can invest this money for greater returns is not the best option. Pillar 3 costs are both opportunity (for savings account) and fees (for funds). These costs are not optimal and I’m not super satisfied.
The social fairness
Pillar 1 implements redistribution of wealth where “the riches” pay more than due and get less while “the poor” pay less and get more. Things may get political here. I’m obviously a “rich” person, so I may be tempted to say “who cares about that”, but I do think that’s fair to make the richer pay slightly more to sustain pensions for the poorer. Pillar 2 is apparently a cost for the government (that bailout in case Pillar 2 funds go broke) due to the 6.8% conversion rate and the very high expectancy of life here in Switzerland. This cost is actually higher for higher pensions (the riches). A re-redistribution of wealth, in the opposite direction.
The overall complexity of the system
The system is complex, yes. That’s not good. But I see it as the minimum complexity to achieve social fairness, flexibility, transparency and control.
I generally like the system. Being “kindly forced” to set aside close to 30% of your salary – with a gentle ~15% contribution by your employer and a nice ~5% contribution by the government in the form of reduced taxes – to get back ~25% of it (instead of 30% due to social fairness) is something good and you should take advantage of it.
Again, I’d prefer a more freedom oriented solution, like US 401k and roth IRA, but with some regulation over minimum contribution by you and your employer. Something like “you can contribute as much as you want to your pension plan, tax free. Your employer must match up to X%. You can invest your money however you want, capital gain and interests/dividends are tax free”
But that’s a dream situation!
Other nice resources on the whole Swiss pension system:
- Here‘s a helloswitzerland.ch summary of the Swiss Pension System (they have a nice final recap).
- Here‘s a nice Swiss Pension System thread on englishforum.ch.
I hope you enjoyed this guide. I want to keep it “Work in Progress”, so feel free to suggest me corrections and things I may have missed.