Idea(s) for a thesis subject?

Hello,

This year I will need to write a thesis/research paper. I would like to speak about pension funds, index fund/ETF, pillar 2 or 3, retirement, ESG or FIRE community. It could be focused on Switzerland or not.

Do you have subjects that you would be interested to know more about and for which there are little info?

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How about the vast difference between median income (85k, MI) and high income (>127k, HI) earner in terms of preparing for retirement in CH?

1st pillar: Good basis for MI, pretty much worthless and an additional tax for HI

2nd pillar: Despite all issues, a strong source of income in retirement for MI and most HI; however HI have much more options (using it as tax scheme by buying into it; getting bonuses paid into it instead of as taxable income; being able to decide individually how to invest through 1e plans, etc.)

3rd pillar: Individual solutions, only partially used / usable by MI and essentially another tax scheme for HI with more and more options for individual investments (e.g. VIAC)

In short: 1st and 2nd pillar work for MI, but they have essentially nothing to say about how their money gets invested and cannot use much of the tax advantages. The complex details of the Swiss retirement solutions however offers vast options for HI to lower their taxes, while being still able to invest their money more or less as they choose.

Out of that, you can spin any kind of thesis. Most things already have been covered, but at least 1e plans are still something rarely seen.

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you can point out

  • the gains in long-term wealth of the average swiss inhabitant if the pension system (pillar 2 & 3) would be generally allowed to (optionally) offer higher risks (in terms of world-stock-exposure), especially for young folks. or: how much wealth is destroyed by forcing a 25 year old to hold half of his portfolio in swiss bonds for the coming 35 years vs. a world portfolio (Vanguar target retirement funds issue)
  • how big the gains would be if a competetive market could be installed such that a person subject to pillar 2 could decide on its investmends at overhead costs approching those of IB (i.e. <0.2% overhead per year)
  • how transparency could be increased by separating wealth buildup and insurance services in pillar 2 prom the cost perspective: think of all the services as death insurance, widow-insurance, and everything else pillar 2 covers in case of whatever. noone clearly states what this costs, so it is a comletely intransparent thing
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I’ve heard a while ago that if you invest 15k CHF for your child when he’s born, you won’t need any pillar to get a pension at all. Unfortunately there is already a research/paper about that somewhere.

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15000*1.06^65 (conservative interest rate, and optimistic retirement age in that far of a future) = 662174.
But that’s today’s money, so account for inflation (which we don’t know).
Anyway, even if it’s say 500k, that is not really a proper pension amount for the following 30 years or so of life (IMO; and for CH).
A nice baby-retiree shower present though, for sure. :slight_smile:

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How about writing about the FIRE movement from a perspective of long term insecurity of the system and government controlled retirement systems vs. taking care of your own retirement plan. I believe many Swiss never really think too much about if they could do something to retire earlier or better for that matter as the government has taken care of this problem already (which is good per se), but then at the same time they’ll get increasingly nervous the older they get (e.g. 50 year old, unemployed, looking for a job, or 60 year old, wanting to retire, seeing that retirement age will “run away” towards 67). There’s tremendous value of building your nest egg of “fuck you money” vs. just relying on the government. FIRE doesn’t need to be Financial Independent/ Retire Early only, it could also mean: Retire to Entrepreneurship or Recreational Employment. Increasing your options in life and having a higher quality of life.

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You can write about demographic Apocalypse of retirement schemes in developed nations and show how FIRE is the only reasonable and sustainable solution.

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How much do you think “they” have on the pillars on your name?

Thanks for your proposal :slight_smile: I agree with the demographic apocalypse, but strongly disagree that FIRE is the only solution.

  • Correction can be made in the “standard” retirement schemes either by increasing the contributions or increasing the retirement age.
  • If everyone become minimalist/strongly reduce their consumption, the GDP increase and stocks growth will be lower.

I don’t really understand the “1e plans”. HI will finance more than he will receive for 1st pillar due to the solidarity principle.

My 2nd pillar projection (at current salary, which is not in that 1742’s above mentioned “high income” category; at age of 65) is around 1M CHF.
Then there is the 1st pillar, which I currently ignore completely in my tracking (and honestly have no clue what it would amount to approximately).

I’m not picking a fight here, just saying that for Switzerland, only those 15k CHF at start would probably not be able to substitute all the pension planning (unless you count with higher compounding rates than I did above). :slight_smile:
Let’s not go off topic on the thesis topic though!

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Then you obviously have much higher contributions than legally required. Just calculated through: At the obligatory maximum insured salary (85k minus coordination deduction of 25k) with minimum obligatory contributions you would end up at

  • 370k CHF at age 65 at 1% interest (current),
  • 533k CHF at 3% (estimated historical average, did not look it up) and
  • 803k CHF at 5% (never seen before for long periods of time)

Pension would currently be 6.8% of that sum per year.
In other words: Obligatory minimum is really not that much, but saves the day together with 1st pillar for median income earners. However, I do believe a majority has higher contributions than legally required (guessing here, did not look this up either)

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Indeed - I am contributing 4.6% of my salary, while my company is doubling that amount (i.e. adding another 9.2%).
I understand it might not be the standard setup.

1e plans are a second pillar solution for high income earner above 127k CHF (named after the article in the law “BVV2” that allows it, which is unfortunately confusing).

It essentially does two things:

  • Eliminates the solidarity principle in 2nd pillar, i.e. your interest will not be lowered by the fact that your fund first hast to cover losses from the pensions paid out
  • Enables you to choose an individual asset allocation at much cheaper cost than the usual funds

A two-thirds contribution from your employer is quite generous, and a total contribution of 13.8% is too, assuming you are still quite young (mandatory are 7% until age 34, 10% until 44, etc.).

If we assume a 7% return each year (the S&P500 return after inflation between 1950-2009 ), the total would be CHF 1’219’092.92.
This would be CHF 40’636 a year during 30 years if we assume 0% returns at the beginning of the retirement.
If we continue to assume a 7% return, a retiree could have between CHF 50’000 and 80’000 a year.

CHF 15’000 is quite low, in comparison one year at university cost between CHF 30’000 and 40’000 per student to the state.

Sure, but in current setup you will never see anything even close to 7% return on your pension fund balance for multiple reasons, especially:

  1. The pension funds by law have to invest (very) conservatively
  2. The management of the funds is often quite inefficient, i.e. expensive
  3. The life span tables consistently underestimated the actual life span in the past, so the fund makes a loss with every retire that it will draw from the total (=your) returns
  4. Besides direct cost, the funds also offer a variety of insurances (mentioned already by others), further diminishing your real returns

Edit: I realize you answered @dbu with the 15k investment at birth scenario. Interestingly, having a 7% return on the mandatory minimum pillar 2 with maximum insured salary nets a very close figure of 1’257k CHF.

This is short-term solution and it’s not sustainable. The only long-term solution is either reversing the demographic trend or replacing the intergenerational redistribution with private investment.

You would shift resources from consumption to investment. Both are part of GDP, but the second is way more important for innovation and long term economic development. I don’t believe providing more capital to companies would reduce value of their stocks.

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