Capital funding method and pay-as-you-go system

The Swiss pension system is based on the three pillars of old-age provision, occupational provision, and private provision. Depending on the type of provision, either the funded scheme or the pay-as-you-go system is applied.

1st Pillar: Old-Age Provision

The first pillar primarily consists of the mandatory contributions to the Old Age and Survivors' Insurance (OASI). Contributors are those who are employed from the age of 17, and those who are non-employed from the age of 20. The obligation to contribute ends upon reaching the ordinary retirement age. The minimum amount that contributors must pay is currently CHF 503. The purpose of old-age provision is to secure livelihoods. For this form of provision, the pay-as-you-go system is applied. Therefore, contributors do not pay for themselves, but finance the retirement of already retired OASI recipients. By paying contributions, however, contributors acquire a claim to benefit payments when they themselves retire.

2nd Pillar: Occupational Provision

In the second pillar, the contributions of the mandatory and supplementary occupational provisions are collected. Employees and employers are equally liable for contributions. The goal of occupational provision is to secure the accustomed standard of living. This is done using the capital funding method. Contributions are invested and earn interest, and upon reaching retirement age, they are disbursed. Each employee receives exactly the money (plus interest) that they have saved during their working life. Thus, the paid-in contributions correspond to the pension paid out.

3rd Pillar: Private Provision

The third and final pillar is that of private provision. This form of provision is intended to cover additional financial needs in old age. It distinguishes between tied provision (Pillar 3a), which can principally be used only for old-age provision (exceptions e.g. mortgage) and enjoys tax privileges, and flexible provision (Pillar 3b), where, as the name suggests, contributing individuals are free in their use. Because in the case of the third pillar each person saves for themselves, the capital funding method is also applied.

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