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GLOBAL INVESTOR 1.17 —14
“Broadly speaking, only urban workers
are covered by the pension system,
and of those workers, only 60% participate.”
Yikai Wang
Yikai Wang To do that, you have to first
be able to check and enforce contributions,
which isn’t easy in developing countries with
large populations. Moreover, China has
many small firms and self-employed workers,
which makes collecting pension contributions
even harder. Second, the timing has
to be right. For example, the US introduced
social security after the Great Depression.
Many European countries set up their
systems after World War II. In the current
climate in China, a law mandating pensions
would be unlikely to pass.
So how do you increase voluntary
participation in the system?
Yikai Wang One reason many private
workers do not participate is because their
employers don’t want to (workers contribute
8% to the system, and employers 20%).
Employers would rather pay workers extra
than contribute to the pension system.
Here, economic incentives might help, as
would making the system a little more
compulsory. Right now, the discussion is
tending toward changing the form of the
pension system itself.
You and your colleagues have proposed
a different recommendation for funding the
pension system than the government has.
Yikai Wang Yes. Because the government
is focusing on the financial sustainability
of the system, it wants to move to a
system in which there is little intergenerational
transfer and everyone relies on their
own contributions. But we think that keeping
an element of intergenerational transfer –
similar to the current pay-as-you-go system
in most continental European and Scandinavian
countries – is important. This would
ensure that the current old persons will
receive a decent pension.
And the sustainability issue?
Yikai Wang It can be solved using other
measures. For example, extending the
retirement age, which at present is still 60
for men and 50 for women. Or reducing the
replacement rate for future generations,
since they will be richer overall.
Among Western industrialized countries,
Switzerland stands out as a model of prosperity
and innovation. But the challenges to the pension
system that it faces are typical.
Giselle Weiss: In 2012, BAK Basel projected in a report to the Swiss
Federal Department of Home Affairs that the old-age dependency
ratio in Switzerland would increase from 29% (at the time of
the report) to 56% by 2060. What is the significance of that figure?
Martin Eichler The old-age dependency ratio tells you how
many working-age people are available to finance one retired
person. This ratio will increase substantially over the next 20 or 30
years: more retirees and fewer people to finance them than
today. And that’s only the financial side. There are also political and
societal consequences of the growing weight of pensioners.
How does Switzerland’s old-age dependency ratio compare with
those of other countries?
Martin Eichler Switzerland is fairly typical of modern Western
industrial economies. The number of retirees is projected to increase
substantially in all these economies. Within Western Europe,
Switzerland is actually slightly better positioned than most countries
today – particularly due to immigration. And we expect that to
continue in the future.
How would you characterize the state of the Swiss pension system?
Martin Eichler The Swiss system is based on three pillars
for stability. Each pillar has advantages and disadvantages. The payas-you-go
part of the system – the AHV – is vulnerable to unbalanced
population developments. The second pillar (BVG), which is a
capital-based system, is less vulnerable to these changes. However,
it is susceptible to financial market fluctuations, which we are seeing
at present. As the time horizon of a pension system is 60 years
or more, you can see how having a mix of pillars is well suited to a
range of eventualities.