Nobody would imagine that the SFr 800bn ($840bn) Swiss pension scheme could go bankrupt. But Swiss pension experts suggest it “will be bankrupt within 10 years (without)…a radical overhaul of the retirement system.” The problem is simple – a combination of low/negative interest rates and an increase in life expectancy.
A major analysis in the Financial Times sets out the key details:
- Prof Martin Eling of St Gallen University estimates that “occupational pension funds will face a SFr 55bn ($57bn) hole in their funding by 2030 if the government does not overhaul the system“
- The reason is that funds have been required to pay an annuity of 6.8% on retiree savings since 2003
- But this is simply unaffordable today: life expectancy at age 65 is now 19 years for men, and 22 years for women
- And the problem is made even worse with Swiss bond markets now paying only negative interest
One solution would be to cut the annuity rate and increase employee contributions into pension funds. But this was rejected in a 2010 referendum. Another solution would be for employers to pay more into the funds. But they are already seeing higher bills, with bank Credit Suisse likely to take “a hit to capital of SFr 500m” this year, due to the impact of interest rate moves on the pension fund. As long as this stand-off continues, bankruptcy threatens.
US SOCIAL SECURITY AND MEDICARE FACE SIMILAR PROBLEMS
Of course, Switzerland is not the only country where pension schemes are facing bankruptcy. .
The non-partisan US Congressional Budget Office (CBO) again highlights the problem for Social Security in its latest report. It warns that annual spending has been exceeding income since 2010, and that the gap will average 17% of tax revenues over the next 10 years. Its forecasts for Social Security and Medicare are confirmed by the Trustees, who include the US Treasury, Labor and Health & Human Services Secretaries.
The problem is easily explained – US fertility rates are already below replacement level at 2.0 babies/woman, so there are relatively fewer young people to pay into the trust funds. And at the same time, more and more Boomers are retiring every year. Thus the CBO forecasts:
- The US Disability Insurance trust fund “will be exhausted in 2017“
- The main Old Age and Survivors Insurance trust fund “will be exhausted in 2032″
- If the Old Age fund is used to bail out the Disability fund, the combined funds “would be exhausted in 2030“
Worryingly, the US Medicare program faces the same problems, and is currently also forecast to go bankrupt in 2030.
Pensions are not just a cost, of course. They provide the money that retirees spend. So consumption and economic growth will take a major hit if pension funds do go bankrupt. More than a quarter of the economically active Swiss population are now aged over 65, as are 23% in the USA, according to the OECD Pension Handbook.
The current failure to tackle this issue thus creates massive risks for the economy, as well as for the pensioners themselves. As US investment magazine Barron’s warned 18 months ago:
“It is difficult enough to put 50-year-olds on notice that entitlements they expect at 70 will probably not be available. To give them this bad news when they’re 60 or 65 is inhumane.”