In Switzerland you pay mandatory social security contributions on your income as below:
Insurance
Employee
Employer
Total
Cap
Old age, survivors’ and disability insurance (AHV/AVS/OASI)
5.3%
5.3%
10.6%
No cap
Unemployment Insurance
1.1%
1.1%
2.2%
148,200.-
Unemployment Solidarity
0.5%
0.5%
1%
On salary in excess of 148,200.-
The 5.3% collected for OASI goes to 3 insurances:
4.35% to State Pension
0.7% to Disability Insurance (DI)
0.25% to Maternity/Paternity (APG)
The max pension you receive at retirement today is CHF 29,400/yr if you contributed for 44 years and had an average annual income of at least CHF 88,200. DI and APG benefits are capped at an identical (or similar) threshold.
So if you earn:
CHF 88,200 = contributions at 10.6% of CHF9,349 and benefits of CHF 29,400/yr
CHF 200,000 = contributions at 10.6% of CHF21,200 and benefits of CHF 29,400/yr
CHF 300,000 = contributions at 10.6% of CHF31,800 and benefits of CHF 29,400/yr
This does not seem like an insurance to me but a tax.
In other countries I have found these social insurances to have caps or at least taper off. For example, in:
Even unemployment contributions in Switzerland at least taper off slightly.
To me this approach does not seem very fair towards middle/high earners (and I admit that being in this camp I am biased )
An equity comparison can be criticised but as a demo if we take a contribution of 20k per year for 44 years at a real return of 4% and 6% withdrawal rate in retirement we would get an ending balance of 2.3m and a benefit of 140k.-/yr in retirement. Puts the 29.4k.- to shame!
So my question: why does OASI not have an upper contribution cap and should it?
You also need to consider that the AHV gives pensions to the children of retirees who are less than 25 years old and widows in case of death.
20k would mean an average salary of 200k for 44 years. In CH, less than 1.5% of the population earns 200k a year. An average of 200k would be very few %.
No, the AVS is a system based on solidarity. Thus, high earners are disadvantaged.
I think that this type of system benefits (and costs less) the entire society by avoiding homelessness, crime, people working until their death etc, which is the case in other countries like the US.
Aha I didn’t know this on the unemployment solidarity being removed this year. But then this makes OASI even more of an outlier in being uncapped as a social insurance?
The AHV benefits to kids/widows is also capped. And if you never worked or are homeless you would get nothing from this system anyway?
To me it seems like Switzerland is an exception in how they fund it which is why I shared. I looked at the systems in Germany, the UK and France who all run it differently: high earners of course pay more but to a point whereas it is uncapped here.
I hoped to understand more about why it was set-up this way in contrast to our neighbours. And maybe some had insights/interesting discourse around the OASI system.
To me as a someone who tries to optimise their personal finances (what I see as the purpose of this forum) then tax drag is one of the most significant things to consider. Thus discussions around social charges, income taxes by canton, deductions, and of course decisions on rates is of key interest to me.
If the mentality is that this is “political” and thus should not even warrant discussion then I guess I misunderstand this forum.
If you cap the contributions, the gap would be filled wtih taxes. With the current setup, at least you contribute directly to system.
I think it’s a fair mechanism, given that pillar 2 and 3a and taxation in general are favorable towards middle/high earners compared to, for example Germany.
Yes, it’s effectively an additional 5.3% income tax on earnings above 150k. I have made that point many times when taking to expats, as this gets mostly overlooked (especially prior to moving here). Then again most value AHV at zero anyway (which I would do too if I only planned to work in CH for a few years).
It would certainly be more transparent to raise actual income taxes instead, but I don’t think this is by design this way to look better in international income tax comparisons. It is just how these systems came to be through the political process.
It does have an implicit upper limit in that at the top end of the income distribution, asset-based compensation starts to dominate comp from employment.
Neither dividends nor rents have (AHV/AVS/OASI) contributions levied upon, so if you want to “dodge” (AHV/AVS/OASI) you’ll have to 1) start a business (LLC/Ltd) 2) pay yourself a “reasonable salary” with OASI levied upon it 3) do a profit after all that and 4) pay dividends out of said profit.
Additional benefit is if you own >10% of that business, the dividends will be taxed at preferred rates…
I always wonder if you are not double taxed in this case (once with corporate income tax and then once more on personal income tax as dividends count as income) and if this really is cheaper than paying the social contributions?
Is there any other topic that can explain a bit more on how AHV worked ? Or can we deviate on this one to understand how useful it can be ?
For foreigner like me, it is not easy to understand the penalty of joining work force in Switzerland at 28 y.o.
I have done a simulation online when working 44 y will generate me 2450 .- by month.
If I still remain married it will be caped at 1750.- by month each as there is a 3500.- by month limit for a couple.
I suggested to divorce close to retirement but she is strongly against it
Let’s say I have worked since 28 y.o. With a minimum salary of 90kchf and I want to retire at 50 y.o. With only 22 y of AHV accumulation instead of 44. I won’t be able to walk at 72 y.o….
What will be the penalty on AHV ?
Is it on top of the 2nd pillar estimation ?
If you retire with 50, you’ll have to keep contributing to AHV based on your wealth (Beiträge der Nichterwerbstätigen). And these years also count, of course. I.e. you can still get 37 contribution years (assuming the regular retirement age stays at 65), in which case you’ll get 84% of the full pension (37/44).
Keep in mind that if one of you dies, the other has to pay inheritance taxes if you are not married. In addition if one dies, the rent of the other will be increased by around 20% if you are married, that’s not the case if you are unmarried.
You’d need to calculate carefully if a divorce before retirement is beneficial.
You are, but it can still be cheaper. I calculated/simulated that quite extensively some time ago, but a very rough calculation is: I pay 11.8% corporate income tax on all profit. Marginal tax rate on income >230k is 7.3% (canton) + 13.2% (federal taxes), so 20.5% in total. If you pay yourself a salary, you pay this 20.5% on your net income, so 12.8% AHV & ALV + (1 - 6.4%) * 20.5% ~= 32%.
Dividends are only taxed at 0.5 * 7.3% + 0.7 * 13.2% = 12.89%. So the total taxes are 11.8% + (1 - 11.8%) * 13.2% ~= 23.4%
In practice, this is much more complicated to calculate correctly, because you also have to consider the pension fund (allowing tax free withdrawals up to 25% of your income, although you have to increase your income for it, which in turn increases AHV & portion of money that is taxed to normal conditions), the effects on the wealth tax, etc…
And the results might differ in other cantons, especially when they have higher corporate income taxes and higher rates for the privileged taxation of dividends.
As @jay said you will have to contribute based on your wealth, which is roughly 2k per year per million net worth. Benefit is that you would have 37 years of contribution and get ca. 2k per month max. But that maximum would require an average of 88k contribution per year, which you won’t have. Ignoring the wealth based contributions you’d only have 53k on average, which is again reducing your pension to ca. 1.65k per month.
I think it’s weird that you can’t contribute back as you can with the 2nd pillar.
It’s maybe not worth it, but surely a safe way to increase a pension.
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