Withdrawing capital on retirement is a capital mistake – supplementary benefits will increase

Dr. Roman von Ah
Economics
Our balanced forced savings system is designed to provide financial security in old age. 1st pillar: AHV pay-as-you-go system, 2nd pillar: BVG funded system and voluntary payments into the 3rd pillar. Examples from abroad – 401K plans in the USA, surrounding countries – show insufficient voluntary pension savings and/or the overburdening of states with the financing of the pay-as-you-go system.
Our balanced forced savings system is designed to provide financial security in old age. 1st pillar: AHV pay-as-you-go system, 2nd pillar: BVG funded system and voluntary payments into the 3rd pillar. Examples from abroad – 401K plans in the USA, surrounding countries – show insufficient voluntary pension savings and/or the overburdening of states with the financing of the pay-as-you-go system.
37 percent of those who have recently retired have their retirement assets from their occupational pension plan paid out. More than ever before. Another 19 percent choose a combination of a pension and a lump sum (BfS 2022). Future applications for supplementary benefits will skyrocket. But first things first.
Employers have shirked their responsibility
In the defined benefit plan (LP), pension fund pensions are set in relation to the last insured salary. The advantages are a high degree of pension security for the insured, together with the AHV, the guarantee of a reasonable standard of living and automatic consideration of inflation. Financing is challenging and puts a heavy burden on employers. It is no wonder that they have largely eliminated these risks.
The defined contribution plan provides too little for the future, does not compensate for inflation and distributes money from the active to the retired.
The dominant defined contribution plan (DCP) in occupational pensions is the answer to the risk avoidance of private and public employers in the employment contract. [1]
The accumulated retirement capital times the conversion rate (UWS) defines the pension. In theory, the BP can generate similar benefits to the LP. In practice, this rarely occurs. In the BP, the pension risk and the associated inflation risk are shifted to the employees.
Conflicting interests in the field of socio-political solidarities
In 2022, CHF 13 billion in capital was paid out – 15 percent more than in the previous year and 120 percent more than ten years ago.
The trend towards lump-sum withdrawals is no coincidence. Those with the necessary leeway often come to the conclusion that a lump-sum withdrawal (as opposed to a pension) is the more attractive solution. This attractiveness includes flexibility, the opportunity to fulfill long-held (consumptive) desires, a lower tax rate, higher-yielding investment opportunities and the inheritance of unused retirement capital.
At least that is the narrative told by financial service providers.
Who profits from the capital withdrawal?
- Pension funds
Pension funds benefit from the lump-sum withdrawal in two ways: 1. the longevity risk disappears from their balance sheets; it is transferred to the pensioners receiving a lump sum. 2. the pension funds retain any excess cover for their benefit obligations (funding ratio > 100%) on a pro-rata basis; it is not included in the lump-sum payment. - Financial service provider
The capital withdrawal is reinvested in the best case. Individual investment advice and/or asset management is likely to be 4-6 times more expensive than in the collective of competitively organized 2nd pillar. No wonder the capital withdrawal is heavily advertised. - New pensioners with low life expectancy
Those who expect to die prematurely in the left half of the mortality distribution benefit from the lump-sum payment (“negative selection”) at the expense of the collective.
Looted society when capital is withdrawn?
Life expectancy is steadily increasing and is around 82 (men) and 85 (women) years. Many people expect to live longer. Healthy pensioners should expect at least 25-30 years of remaining lifetime.
Private provision for the risk of longevity (LLR) is probably not an option for 90% of the Swiss population. Those who use a lump-sum withdrawal to improve their financial situation in old age underestimate the high costs of annuities (“overconfidence”). They fail to recognize the challenges of handling additional expenses and/or leaving inheritances to children.
Once the capital has been used up, unforeseen expenses, illnesses or nursing home costs quickly become millstones around your neck. The AHV will not save you from drowning, but applications for supplementary benefits will.
The privatization of benefits and socialization of the disadvantages are at the expense of the general public and the younger generations. Lump-sum withdrawals, if permitted at all, should be strictly limited. One approach could be to allow partial lump-sum withdrawals only if the pension from the occupational pension plan is at least CHF 50,000 per year.
[1] : The message 'Introduction of BVG Compulsory Insurance' (19.12.1975) formulated the performance target (LZ) in the sense of the LPs. (Art. 15). LZ in the sense of BP (e.g. UWS) was introduced into the law via parliamentary discussion.
This text was edited and slightly abridged published under the title “Für steigende Ergänzungsleistungen ist gesorgt” on the internet platform of the professional journal "Schweizer Personalvorsorge / Prévoyance Professionnelle Suisse" in September 2024 (in German only).