An overview of Geneva's city center is seen from the tower of St. Pierre's cathedral in Geneva, Switzerland, on Friday, Jan. 15, 2010. London-based hedge funds will consider relocating to Swiss financial centers, such as Geneva if the tax and regulatory burden increases. Photographer: Adrian Moser/Bloomberg Geneva, Switzerland (Photo: Adrian Moser/BB)

Thanks, in part, to a great retirement plan account annuitization system, Swiss people ages 65 and older have a median household income that’s about 50% higher than the median for U.S. people ages 65 and older.

Ronald Klein, director of the global aging research program at the Geneva Association, compares the Swiss, United Kingdom and U.S. employer-sponsored retirement plan systems in a new report aimed at policymakers.

“Of these three countries, Switzerland clearly has the best system, with automatic enrollment into occupational pension plans, automatic escalation of contributions as the employee grows older, and automatic annuitization,” Klein writes. “Of the three countries, the U.S. clearly has the worst system.”

(Related: Geneva Association: Insurers Stabilize The Financial System)

The U.S. system is weak because it lets participants in 401(k) plans and other defined contribution plans cash out at age 59½, and because there is no guarantee that a defined contribution plan will offer any annuitization option, Klein writes.

The United States does seem to be moving in the right direction, with a number of proposals to help defined contribution plan participants annuitize their savings, Klein says.

A full copy of Klein’s report is available here.

The Geneva Association

The Geneva Association is an international equivalent of the United States’ LIMRA.

The organization itself calls itself “the leading international think tank of the insurance industry.”

The organization was founded 44 years ago and has its headquarters in Zürich, in Switzerland.

The current chairman of the association is the chairman of Aviva. But one of the four vice chairmen is John Strangfeld, the chief executive officer of Prudential Financial Inc.

Brian Duperrault, the president of American International Group Inc., is also on the association board.

How Europeans Think About Retirement Plans

In the new association report, Klein uses European “pillar” language to talk about retirement income programs.

Europeans use the term “Pillar I” to refer to government-run retirement income programs, such as the Social Security retirement income benefits program.

Europeans use the term “Pillar III” to refer to individual retirement savings arrangements, such as individual annuities purchased away from work.

Europeans use the term “Pillar II” to refer to occupational retirement benefits arrangements, such as traditional defined benefit pension plans, or 401(k) plans.

The Report

The Geneva Association released the report because it, like U.S. insurance groups, is working to persuade policymakers that annuitization arrangements from private insurers can help increase aging Baby Boomers’ well-being.

“Government-supported social retirement plans (Pillar I) are under extreme financial pressure due increased life expectancies and low fertility rates. Individuals are compelled to provide for themselves a suitable retirement through occupational pensions (Pillar II) and personal savings (Pillar III),” the association says in its teaser for the report. “The insurance industry can help, as it is the only industry that accepts longevity risk as a core business, and is a long-term provider of lifetime annuities—an insurance that a person will not outlive their retirement savings.”

3 Facts About How the Swiss System Works

1. Swiss workers earn more to start with.

Swiss workers start out with a retirement savings edge, because Switzerland has an average of about $75,400 per year in gross domestic product (GDP), or national income, per resident. That’s about 27% than the U.S. average of $59,300 in GDP per resident, according to 2017 GDP data from Swiss Re.

2. Swiss workers save a lot more than U.S. workers.

Switzerland has also persuaded its people to use about 19% of their disposable income for personal and pension savings.

Only 6% of disposable income in the United States, and 0.2% of disposable income in the United Kingdom, goes toward personal and pension savings.

3. Swiss workers, and employers, typically contribute a lot to defined contribution retirement plans.

The minimum required employer contribution is 2% of affected income, for the “basic option” for a 21-year-old employee. The maximum required contribution can be as high as 17.4% of affected income, for a worker ages 53 to 65 who is getting the richest possible level of benefits.

The minimum required employee contributions are the same as minimum employer contribution levels.

A retirement plan can let the participant withdraw 100% of the funds in a lump sum at retirement.

Otherwise, the plan must provide an annuitization feature.

In 2015, participants who were retiring annuitized 83% of the account funds that they could annuitize.

Swiss retirees do have to pay for their own health coverage, but “the income for people aged 65 and older in Switzerland far exceeds income for people in the U.K. and U.S. at the same age, Klein writes. “This is mainly due to a higher savings rate (including automatic escalation of contributions) and a higher annuitization rate.”

Klein acknowledges that the structure of the Swiss system can lead to problems.

“Older workers may have a more difficult time finding jobs in Switzerland due to the increased cost to the employer for pension benefits,” Klein writes.

Another challenge is that the structure of retirement benefits is so politically sensitive, even in Switzerland, that making even modest changes can be difficult, Klein says.

Pension reform “will only get more sensitive as populations continue to age,” Klein writes.

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