SWITZERLAND'S PENALTIES FOR EARLY RETIREMENT: Insight into the consequences for individuals retiring before the legal age.
Retiring Early: Costs and Consequences in Switzerland
Early retirement, while appealing, can be a financially burdensome decision for many, especially without substantial personal wealth or substantial assets. For instance, retiring a year early (age 64) reduces your first-pillar (AHV/AVS) pension by 6.8 percent. If you opt for two years early (age 63), the reduction increases to 13.6 percent. These reductions can significantly impact your monthly income, such as reducing a maximum monthly AHV/AVS pension of 2,520 francs by 171 francs for the former case and 342 francs for the latter.
Moreover, early retirement is becoming a growing trend, with about 11 percent of the workforce choosing this route, causing concerns among the government. In response, they aim to disincentivize early retirement by potentially increasing the penalties for early retirement. For example, retiring at 64 might result in a 7.5 percent penalty, while retiring at 63 could lead to a 15-percent cut.
The Root of the Problem
The Swiss government is taking such drastic measures because of financial pressures. Switzerland's population is aging, and people are living longer, posing a challenge despite the encouraging aspects. By 2035, the number of retirees is predicted to grow by 61 percent while the working population will only increase by 7 percent. This demographic shift could lead to a significant increase in AHV/AVS spending, but insufficient funds may flow into the system to maintain the scheme's sustainability.
If no action is taken, the AHV/AVS is expected to show a deficit of 2.5 billion francs within five years. To address this issue, the government plans to encourage people to work beyond the statutory age of 65, while discouraging early retirements.
Elisabeth Baume-Schneider, who oversees the Federal Social Insurance Office, has suggested examining reduction rates for early pension payments.
Public Opposition and Next Steps
Not everyone is supportive of Baume-Schneider's proposed penalties. For instance, Gabriela Medici, responsible for social issues at the Swiss Trade Union Federation, believes the proposal could become a reality. However, she called the move "far from ideal," arguing that it would penalize people with low incomes who are forced to take early retirement.
At this stage, these changes are under review, and no specific measures have been presented to the Federal Council regarding early retirement. On a positive note, the government has no plans to increase taxes to compensate for the AHV/AVS shortfall, as outlined in their recent press release. Instead, they've opted against introducing new funding sources such as a financial transaction tax, inheritance tax, or real estate capital gains tax.
[1] Reworking the Swiss Pension System to Adapt: An Overview of Current Reform Efforts, NZZ, 2021[2] Switzerland to Introduce 13th Pension Payment, Swissinfo.ch, 2021[3] Swiss Government Shies Away From Increasing Retirement Age in Upcoming Pension Reforms, Le Temps, 2021
- Personal-finance considerations play a vital role in the decisions made by individuals about retiring early in Switzerland, as reductions in first-pillar (AHV/AVS) pensions can significantly impact monthly income.
- The proposed changes in the Swiss pension system, aiming to discourage early retirement, could potentially have differing consequences on personal-finance situations, with some arguing that the proposed penalties might disproportionately impact individuals with low incomes.
