“I thought you had an amazing secret plan 😅”
“Yes, I do. But I don’t really want to get political. Though your opinion on this would be very interesting.”
An interesting conversation, which started with the former member of federal council, Mr. Blocher, suddenly fearing for his own pension, which led him to suddenly want his federal pension paid out. Not that the billionaire would be in dire need of it, but he is still entitled to his pension. We also don’t go to the pension fund of our employer to relinquish our capital or our pension. Maybe it was also simply because Mr. Blocher’s daughter cut his allowance.
The flaws of the AHV
I don’t write about the AHV a lot. For a good reason. You can’t change anything about it without the agreement of the whole country. In the case of your pension fund, however, you must only convince your boss or management. The pillar 3a is your own responsibility. But what if we could change the AHV? How would we redesign it?
Today I invite you to join me in a fantasy land in which we get to reinvent the AHV in a way that is fair. For a bargain price, which must be paid in advance though. It would be ideal for you to take out your calculator now, so you can check my calculations and tell me if I miscalculated.
But first, I will show you a few of the flaws in the AHV, so that you understand what needs changing and why.
Contrary to the pension fund or the pillar 3a, you don’t save for yourself in the AHV, but your money goes to the people wo are retired already. Or, put differently: the money you contribute to the AHV today is spent on food at Coop tomorrow, by your grandmother.
Doesn’t sound so bad now, does it? The problem: Your grandmother receives no less than CHF 14’340 a year from the AHV. At least. This is the minimum AHV-pension. But she could also receive CHF 28’680 from the AHV every year. I don’t know how much you are earning, but I am not contributing CHF 28’000 to the AHV a year, therefore I am not able to support my grandmother on my own.
You and your employer together contribute 8.7% to the AHV every month. So, if you make CHF 100’000, that only adds up to CHF 8’700. Not enough for the minimum, therefore, let alone the maximum pension.
What is it then, that the bright minds of 1948 were thinking when they introduced the AHV back in 1948? Well, they expected 19 wage earners would pay for one retiree. And, to be fair, we have to mention that in the year of 1948 life expectancy was way below 86. Today, we have a mere 4 wage earners for one retiree. Thus, something went horribly wrong in those calculations.
AHV contribution gaps
SRF published an interesting report on the issue of AHV contribution gaps.
These contribution gaps arise if someone does not contribute to the AHV from age 21 on. So, if you are a student until the age of 25 and never take care of the AHV yourself, you will run into problems sooner or later. This is also the case if you take a hiatus from work from the 1st of January to the 31st of December. You can easily solve this issue, as you can pay your contributions up to five years retroactively. But only if you resided in Switzerland throughout those five years.
You should also check whether all your employers contributed to the AHV in your name. If they neglected their duty, your retirement pension will be cut and not theirs. You will need your wage statements and maybe your tax declaration for that. But let’s be honest: who keeps their wage statements from 20 years ago?
The issue of contribution gaps is even worse for people who move to Switzerland. So, if for example our German friends moved to Switzerland at the age of 35, they already have a gap of 14 years. Impossible to make up for that. Sure, they would receive a small pension from Germany for the 14 years they worked there, but we are all well aware that we earn more and also have to spend way more here in Switzerland than is the case in Germany.
Contributions gaps can therefore be quite severe.
Cuts for early retirement
Not only missing contribution years can lead to cuts, but retirees also pay a hefty price for early retirement. 6.8% per year. So, if you want to retire at 63 instead of 65, you will receive 13.6% less in AHV pensions for the rest of your life. Let’s assume you get the maximum AHV pension and live up to the ripe age of 86. Then you are paid out CHF 476’260 over the span of your whole retirement, rather than CHF 544’920. You lose CHF 74’109.
That’s a lot of money, if you consider that, depending on how much you earn, you contribute much more than you will ever receive anyway.
Average salary is decisive
As there is a minimum and a maximum AHV pension, there also needs to be a calculation basis for that. That basis would be the Scale 44. Why Scale 44? In theory we should all contribute to the AHV from 21 to 65. That means exactly 44 contribution years – therefore Scale 44.
The AHV’s ceiling
The ceiling of the AHV describes the phenomenon of cuts to the benefits of married couples. Married persons receive a mere 150% of the maximum pension, rather than 2x100%. In CHF: 42’975 (with ceiling) instead of CHF 57’360 (2x the full benefit).
You can therefore miss out on a yearly CHF 14’340 if you are married.
High expenditures for employers
Because the AHV is not only financed by employees, but also employers, it is a significant expenditure for all companies.
More recipients than contributors
I have already gone over PAYGO. Now there will be a big shift pretty soon and pretty quickly for a simple reason: Babyboomers are becoming retired. There have never been as many babies as during the mid-20th century baby boom. This whole generation is retiring now, little by little, and the balance in the AHV will be lost for good. That leads to more people drawing an AHV pension than people contributing. This will be the inevitable final blow to the AHV.
Politicians will continue trying to save the AHV with additional taxes. By the time they will finally accept and acknowledge that they have been trying to fill a bottomless pit, it will be too late for the AHV.
This is exactly why we need new solutions.
My idea for saving the AHV: ETFs from birth
Back in 1948 the AHV was surely a good idea. Unfortunately, we slept through adapting it to the new circumstances. People live to see an older age, fewer people contribute to the AHV, and the strict regulations make it incredibly rigid.
I have a modern and cost-effective solution in mind. This solution is so simple and, most importantly, it is without risk. ETFs.
Those who possess financial education know, that stocks are the most profitable financial investment there is. They are not only profitable, but from an investment horizon of 15 years on, it is also very safe. The amount of money we lost throughout the COVID-19 crisis, no one will care about that anymore in 14 years. Even if your 15 years just ran out now, during the pandemic, you still made a profit.
Now imagine your investment horizon is not 15 years, but 65. Or 100 years even! Here’s my idea:
CHF 15’000 to replace the AHV – one-off
CHF 15’000 are to be invested into a globally diversified, accumulating ETF at the birth of every child in Switzerland. I will take this chance to reiterate some of these keywords, so that everyone understands what I am talking about:
Exchange Traded Funds – passively managed funds, which do nothing more than to blindly reflect a market. As they genuinely follow the index blindly, no expensive fund manager is needed, and this makes ETFs extremely affordable. There are ETFs with a TER (Total Expense Ratio) of 0.07%. Even 0.2% would be very inexpensive.
We don’t put all our eggs in one basket. Some ETFs index the whole world. This includes thousands of companies. It is simply impossible for all companies globally to go bankrupt at the same time.
ETFs come in two different forms: distributing and accumulating funds. Distributing ETFs regularly pay out dividends, basically a form of interest. Accumulating funds don’t disburse the dividends, but rather reinvest them into themselves. So, instead of getting an additional CHF 20 on your bank account every month, your accumulating ETF automatically buys more fund shares with those CHF 20. This is how your assets grow automatically and you don’t have to do anything at all.
When talking about dividends from shares and funds, we mean the percentage of the profit of a company that we bought shares from. If one of these companies makes gains, you have a right to a part of that.
Financing the CHF 15’000
The AHV is the state provision. My suggestion would be that the state, so Switzerland itself, would contribute CHF 7’500, so half, to the ETF. The other half is paid by the employer of the parents. So, CHF 3’750 per employer – one-off.
In comparison, people who earn CHF 86’040 (about the amount needed for the maximum AHV pension of CHF 28’680) receive CHF 3’742.74 from their employer – every year.
Projecting the CHF 15’000
I hope you have your calculator ready.
You can google the average yield from shares over a long period of time yourself. I am merely citing an excerpt from a report in the Handelszeitung from 11.02.2019.
Seit 1926 legten Schweizer Aktien jährlich rund 7,8 Prozent zu. Konkret: Aus 1000 Franken, die 1926 in Schweizer Aktien investiert wurden, wären heute 940'000 Franken geworden – abzüglich etwaiger Kosten für die Vermögensverwaltung.https://www.handelszeitung.ch/geld/so-rentabel-sind-aktien-langfristig
I am generous and will therefore only use 7% in my calculation:
+/- 15’000 PV x 65 N x 7 I/YR = 1’219’092.92
Translated, if you’re not familiar with the financial calculator HP 10BII:
CHF 15’000 deposit, duration 65 years at an interest of 7% equals final assets of CHF 1.219 million.
Don’t look at the screen so shocked, recalculate it. Do we now want to go ahead and calculate the pension from that?
Retiring on the CHF 1’219’092
We can technically go two ways from here on out. The retiree is paid out the CHF 1.2 million, or we convert the accumulating ETF to a distributing ETF. If you have been reading my blog for longer, you know which method I prefer. Let’s go through both scenarios.
Payment of the capital through a fixed retirement pension
The current AHV expects us to live to the age of 86, at which we will finally say our goodbyes and go into the light. As I think 86 is not enough, I would like to up the age to 100. So, 35 years from retirement on, instead of the present 19 years.
CHF 1’219’095 / 35 = CHF 34’831.23 per year.
As a reminder, the current AHV pays a maximum of CHF 29'400 (2023), if you are not married. If you are married, you get CHF 44'100. With my solution you get CHF 34’831 twice, a total of CHF 69’662.
Financing retirement pension with the 4 % rule
Now I think it would be a massive mistake to take the money off the market and not leave it invested for the remaining 35 years. Especially because we can make use of the 4% rule here.
The 4% rule states, that you can use up 4% of your assets every year, without reducing your assets on the market. Let’s check:
CHF 1’219’095 x 4% = CHF 48’763.72 per year.
So, instead of CHF 28’680 you receive CHF 20’000 on top. No matter how old you are. If you are married, it is even an additional CHF 54’867, every year.
And, as a reminder, you still have a capital of CHF 1’219’295 in your name, which will increase every year.
But what if the stock market crashes right when I retire
While this is a valid question, it still shows a lack of financial education in the richest country of the world, Switzerland.
After 65 years the stock market can do a double backflip for all I care, you will have made enough money with it in any case. If the market crashes, you only withdraw CHF 28’680 (according to the current maximum AHV pension) or CHF 48’763 (the pension from my idea). The rest then has more than enough time to recover. Especially in times of COVID-19 we saw, how quickly 40% is lost in the stock market, but also, how fast the market can recover.
Think about solutions to the problem we have with our AHV yourselves. I have done my part. Share your ideas for saving the AHV in the comments. And if there is someone who’s in politics reading this, I am more than happy to discuss this at length.
See you soon,
Ps. This post turned out to be longer than planned. I’d appreciate you clicking on the little heart down here, for my efforts and for the salvation of the AHV of your kids.
Pps. At an interest of 7.8% it would have turned to CHF 1’978’384 by the way. 😉
FinanzFabio will mit finanzieller Bildung auf seinem Blog die Schweiz vor der Altersarmut retten. Er glaubt nicht mehr an die AHV.