The next reform of the AVS: what consequences for the Swiss once adopted?

After two similar unsuccessful attempts at reform by the government, AVS 21, a new reform proposal, has much to prove. The people will vote on this reform in September. Once accepted, AVS 21 is expected to be implemented in stages by January 2023.

At first glance, the reform, proposed by the Federal Council, aims to correct the financing imbalance of the AVS. The imminent deficit in AVS funding by 2029 is explained by the fact that the number of retirees is increasing faster than the number of active workers (a large part of the population is rapidly approaching retirement – 65 years). This trend jeopardizes the financing of old age pensions. In this context, AVS 21 plans to maintain the level of retirement pensions and stabilize this 1st pillar of Swiss social security.

Prima facie, the initiative looks promising. However, most citizens are faced with questions regarding planning their savings, investments and assets, such as

• What changes does the AVS 21 reform propose?
• Who will be affected by the new measures?
• What happens if I want to retire early or plan to continue working during retirement?
• What impact will the reform have on the payment of vested benefits?

In this article, the retirement specialists at Impact FE explain the complexity of the AVS mechanism, its operation and the consequences of the new AVS 21 reform.  

What is AVS?

AVS, or old age and survivors' insurance, aims to partially compensate for the loss of retirement income due to age and death. It is compulsory and vital insurance for everyone in the context of retirement. The old-age pension must allow the insured to withdraw from working life at the prescribed age, while guaranteeing material security and professional foresight during retirement. The survivor's pension also helps prevent the death of a parent or spouse from causing undue human suffering or financial hardship.

What does the AVS 21 reform propose?

The measures proposed by the AVS 21 reform are the subject of numerous debates. Here is a brief overview of what the reform proposes:  

• Increase in women's retirement age to 65.  
• Concept of reference age (instead of ordinary retirement age), being uniform for men and women in AVS and compulsory occupational pensions.
• More flexible retirement options
• Encouragement to continue professional activity beyond the reference age  
• Increase in value added tax (VAT) by 0.4 percentage points

Who will be affected by this reform and how?

The measures recommended by this reform could potentially fill contribution gaps and improve the income determining the financing of the AVS. As compulsory insurance, certain aspects of the reform could then potentially affect everyone.  

Impact on women

The reform raises the retirement age for women from 64 to 65. As a result, they will have to work one more year to receive their old age pension. The new reference age will come into force one year after the implementation of the reform and will be applied in three-month increments per year. If AVS 21 is approved on September 25, it will come into force in 2024 and the reference age will be raised to 65 in 2028 for women born between 1961 and 1969.

To mitigate the effects of an additional year of work, the council has provided certain compensatory measures for women in the transitional generation aged 9 (women aged 55 or over at the time the reform comes into force).  

These measures include:

• A lifetime pension supplement of CHF 160 per month maximum for those who do not receive their pension early. Supplements would be paid in the event of postponement.
• A more favorable rate of reduction in early retirement pension than in the current system for women retiring at or before age 64. This measure will facilitate a phased retirement instead of a one-time retirement.
• A possibility of early retirement of up to three years (62 years) for women of the transitional generation.

Impact on men and women (not part of the transitional generation)

Under the current system, women aged 64 and men aged 65 (ordinary retirement age in both cases) are entitled to an old-age pension. Insured persons can start receiving their pension one to two years before ordinary retirement age. On the other hand, the pension can be deferred for a maximum of five years after ordinary retirement age. The pension is reduced by 6.8% if it is received one year earlier, and by 13.6% if it is received two years earlier. In the event of deferral, the pension increases by 5.2% after one year, then by 31.5% after five years.

The new reform offers more flexibility. AVS 21 provides for the possibility of receiving an old age pension between the ages of 63 and 70, as well as anticipating or deferring part of the pension (between 20 and 80%) for men and women.

The early reduction and late increase rates will be adjusted for life expectancy and reduced accordingly, with smaller reductions planned for low incomes (RAM CHF 57,360). However, these adaptations are not planned before 2027, and the Federal Council will set the new rates shortly before their introduction.

The AVS provides a tax allowance for disabled retired people who need regular help from others with ordinary acts of life. The AVS 21 reform proposes that the waiting period to be entitled to an AVS allowance be reduced to six months instead of one year according to the current regulation.

To avoid future difficulties, it is important to initiate preparation for your retirement as early as possible. Our expert advice will help you develop a solid retirement plan.

Impact on those who wish to continue working beyond the ’ retirement age

Retirees who continue to work could now fill their contribution gaps at retirement age or increase their pension amount to the planned ceiling. In the current system, active retirees did not receive a higher pension (as long as they do not postpone the AVS pension) despite the payment of contributions to the AVS (on the part which exceeds 1400 francs per month). The new reform will attempt to improve this point and encourage the population to remain active beyond the reference age.

In addition, active retirees could waive payment of the deductible and take into account AVS contributions paid after the reference age of 65.    

Impact on the payment of free passage

It may be more difficult to defer withdrawal of the vested benefits. If the Federal Council adapts the ordinance on vested benefits in occupational pensions (proposed by the reform), policyholders will only be able to postpone the withdrawal of their vested benefits beyond retirement age if they continue to engage in gainful activity. Furthermore, those affected may have to pay more taxes.  

At this stage, it is better to call on the wealth and tax advisors at Impact FE. We will help you understand the issues of retirement taxation.

Impact on future retirees

Voluntary partial retirement is an option already offered by many retirement organizations to their members. This option will now be prescribed by law and policyholders will therefore have the right to take partial retirement in a maximum of three stages.

The proposed VAT increase will affect all consumers. If this measure makes it possible to rebalance AVS funds, it also concerns all future beneficiaries of AVS pensions. An increase in VAT of 0.4 percentage points to finance the AVS will increase ordinary VAT from the current 7.7% to 8.1%.

In short, with the increase in VAT, the new reference age for women's retirement, contribution rates and the financing of AVS, the burden on future generations will be heavier.

It remains to be seen whether or not all the measures proposed by the reform will be accepted by the public. In any case, the AVS 21 reform will be as complex as the current AVS regime. Understanding how it works and its many subtleties is essential if you want to build solid, worry-free retirement assets.  

To achieve this, whether you are an individual or a business, you need to entrust retirement planning to experts. Whatever the outcome of the vote, the specialists at Impact Financial Engineering are at your disposal to help you set the course for the financial future you want to have.

Contact us from today!