Together with the supplementary benefits under loss-of-income insurance (EL), Swiss old-age, survivors' and disability insurance (AHV/DI) forms Pillar 1 of the three-pillar model which is enshrined in Switzerland’s constitution.
The purpose of Pillar 1 is to provide financial security for the livelihood of retirement pensioners, disabled persons and surviving dependants. In Switzerland, state pension provision can only partially secure livelihood. For this reason, the supplementary benefits were introduced in 1966 in addition to the AHV/DI which was established in 1948. Since then, these two components have formed Pillar 1 of our social system.
Pillar 1 is divided into two parts: AHV/DI (old-age, survivors' and disability insurance), and supplementary benefits under loss-of-income insurance (EL). Pillar 1 also includes earnings compensation during military service (EO) and for maternity, as well as unemployment insurance.
AHV/DI and supplementary benefits (EL) differ mainly as regards the way they are financed. AHV/DI is financed by a pay-as-you-go method based on the principle of solidarity. For this purpose, pensions in progress and other benefits disbursed are paid for by the salary contributions of the working population. On the other hand, supplementary benefits are funded directly from Federal and cantonal tax. The following graphic gives you more information about the structure of Pillar 1.
Old-Age and Survivors' Insurance is Switzerland’s mandatory state pension insurance. It secures a person’s financial livelihood in old age, and pays surviving dependants' pensions to widows and widowers following a death.
As a general rule, all employed persons domiciled in Switzerland must pay AHV contributions. Contributions are deducted from the salary by the employer, and are used directly to pay for pensions currently in progress, according to the pay-as-you-go principle. Employers and employees pay equal shares of the amounts to be transferred. The AHV contribution obligation begins when a person turns 17 and ends on attainment of the regular retirement age (64 for women, 65 for men).
Each missing contribution year results in a reduction of the pension payable to the insured person in old age. This makes it important to close pension gaps of this sort within 5 years at most. The complete contribution periods are 44 years for men (for a retirement age of 65) and 43 years for women (for a retirement age of 64). Beneficiaries can pay contribution gaps back into the AHV fund within the five-year period after such gaps arise. Alternatively, of course, they can opt for voluntary private pension provision, for example by paying into a Pillar 3a or 3b account to provide security in old age.
Entitlement to a pension from Pillar 1 is calculated on the basis of the person's individual account (IC). This account is used to calculate and record the personal income earned by an individual. Single persons receive an individual pension that, by law, must not be more than double the minimum retirement/disability pension per year. The amount of an AHV pension for married couples is calculated as half the total of both their incomes. If the total pension disbursed is 150% above the maximum pension permitted by law, the individual pensions are reduced. This fact is often forgotten when planning retirement provision, and it can indirectly lead to dangerous loss of income in old age.
Anyone looking after children below the age of 16 during the period of their life when they must pay contributions will benefit from additional education credits. These are offset against the relevant annual income for the AHV pension, and they result in higher annual AHV disbursements provided that the maximum retirement/disability pension is not exceeded. Care credits can also be claimed in the same way, for example in connection with looking after relatives in need of care.
Income splitting means that the incomes earned by two marriage partners during the years of the marriage are split into equal portions. For this purpose, 50% of each of the two incomes is credited to the other partner’s AHV account. This regulation, introduced in 1997, applies to married and divorced couples, widows and widowers.
The regular date for retirement is at age 65 for men and age 64 for women. However, insured persons have the option to advance disbursement of their AHV pension by 1 or 2 years, or to defer it by up to 5 years. Early retirement leads to reductions in the pension disbursed, whereas deferral is rewarded with a higher pension. Applications must be submitted both for early retirement and for the deferral of a pension.
Depending on the average income earned and the resultant AHV deductions, the normal full pension is at least CHF 1,225 and at most CHF 2,450. If a person is simultaneously entitled to draw a widow's / widower's pension, the higher pension is paid out. If persons charged with childcare are entitled to draw a child's pension, this will also increase the AHV pension that is disbursed, as long as the total amount does not exceed the maximum retirement/disability pension per year for single persons. A maximum of one and one half times the joint retirement income of the wife and husband applies to marriage partners.
Surviving dependants' pensions are intended to prevent financial hardship due to loss of income when a marriage partner or parent dies. Marriage partners and divorced persons are entitled to widow's / widower's pensions, but the qualifying conditions for wives differ from those for husbands and divorced persons. Survivors' Insurance has been part of the AHV (Old-Age and Survivors' Insurance) since it was introduced in 1948.
Disability insurance, introduced in 1960, is an integral component of Pillar 1 of the Swiss pension system. The purpose of DI is to mitigate the economic consequences of a health-related impairment of gainful employment.
Persons who, for health reasons, cannot be reintegrated into the work process to an extent of at least 40% are entitled to draw benefits from disability insurance. In this regard, DI follows the "integration before pension” principle. As well as paying pensions, the DI finances various reintegration measures: these include medical, educational and vocational measures, provision of medical aids, and much more besides.
Anyone who draws an AHV or DI pension but whose income does not cover their minimum living costs is entitled to supplementary benefits. Other conditions for entitlement to draw supplementary benefits include a domicile in Switzerland with actual residence in this country, and further requirements which must be met. Unlike AHV/DI benefits, which are financed by the working population on a pay-as-you-go basis, supplementary benefits are funded from Federal and cantonal taxation.
As a general rule, all people working and living in Switzerland are covered by Pillar 1.
Every person who lives and is gainfully employed in Switzerland must pay AHV contributions. Half of the AHV contributions are funded by the employee, and half by the employer; they are shown directly on the salary statement as the social insurance deduction.
Supplementary benefits are paid out when the AHV pension disbursed can no longer cover the minimum cost of living. A domicile with actual residence in Switzerland is a prerequisite for the receipt of supplementary benefits.
Income from the AHV pension is disbursed only to individuals who were actually in gainful employment, and who paid into the first pillar. If you want to protect a partner who was not employed, you should consider a Pillar 3a solution such as a life insurance policy, a 3a account or other options to build up private retirement provision. A solution of this sort can also provide protection in case of death or occupational disability, and it allows general financial planning for the period after retirement.
Income from the AHV pension, or Pillar 1, only covers the bare minimum of living costs. If you want to continue your accustomed lifestyle in old age and, in addition, want to fulfill some of your wishes, you should build up private retirement provision, pay into Pillar 3 and ensure security in your old age with a suitable pension solution. Incidentally, this is also a smart way to save on taxes and achieve your individual savings goals.
Do you have any questions, or would you like a pension consultation? We are always there for you!