As the first of a three-part series, this article will dive into the first pillar of the Swiss pension system. See Pillar 2 and Pillar 3.
Pillar 1: State Pension Provision
Most similar to the concept of US social security, the first pillar of the Swiss Pension System is comprised of three parts:
1. Old-Age and Survivors’ Insurance (OASI, AHV/AVS)
Perhaps the most integral part of the first pillar, the OASI grants pension benefits to those reaching retirement age or the surviving family of an insured person. We will focus primarily on this part throughout the article.
2. Disability Insurance (IV/DI)
Swiss Disability Insurance is available to eligible individuals who are unable to work due to health reasons. Those who qualify may work up to 40% of the ‘standard’ work week and still retain this benefit. However, the amount of benefit received is unique to your specific situation.
Similarly, the US offers Social Security Disability Insurance (SSDI) for those unable to work due to a medical condition that is expected to last at least one year or result in death. While eligibility for the Swiss benefit is based on a percentage of time worked, the US benefit is dependent on your income level. You cannot make more than $1,350 (2022) per month and retain eligibility.
3. Supplementary Benefits (EL)
Funded through taxation from the Federal and Cantonal governments, supplementary benefits help fund maternity leave, military pay, and cases where pensions and other income do not cover the minimum cost of living.
Contributions
Pillar 1 is a mandatory state pension insurance in which contributions are made by both you and your employer. These contributions are automatically deducted from your salary, similar to US social security.
Mandatory contributions begin at age 17 (if employed, or 20 if unemployed) and end at full retirement age (64 for women, 65 for men). As of January 2022, the contribution rate is 10.6%, split between you and your employer, each contributing 5.3%.
Whereas US social security contributions are capped with wages above $142,000 (2022), there is no wage cap on Pillar 1 contributions. You and your employer will continue to pay 5.3% on all earned income. However, some income is not considered for this calculation, such as your Swiss family allowance.
Taxation
The biggest difference between the Swiss and US Social Security system is taxation during the years of contributions and distributions.
In Switzerland, contributions reduce your income and, therefore, your overall Swiss tax liability. When you retire and receive distributions, they will be fully taxed at your ordinary income tax rate. The applied tax rate is often lower than it would be at the time you made the contributions, as your overall income may be lower in retirement.
In the US, contributions do not reduce your income and therefore are fully taxable. When you retire and receive distributions, up to 85% of your US distributions may be taxable, leaving 15% or more as tax-free income.
Retirement
Swiss full retirement is reached at age 64 for women and 65 for men. You have the option to receive early distributions up to 2 years before retirement or defer them for up to 5 years. Through receiving early distributions, your future benefits will be permanently reduced, while deferring will result in a higher benefit in future years.
You must apply to start receiving distributions, either at full retirement age, when you wish to receive early distributions or for deferment.
US full retirement age has been slowly increasing over the years and currently stands at 67 for both men and women. You have the option to receive early distributions starting at age 62 or defer until age 67. The same rules apply, as early distributions permanently reduce future benefits, and deferring results in a higher future benefit.
Early Retirement
If you choose to retire more than two years before reaching full retirement age in Switzerland, you will still be required to make AHV/AVS contributions while you are not employed. The required contributions can range from CHF 41.90 to CHF 2,095.80 per month. The exact amount you need to contribute is uniquely calculated based on your net worth and other income sources.
In the US, the minimum contribution period to qualify for distributions is 40 quarters (or 10 years). If you stop working, you are not required to continue making contributions, but will receive a reduced benefit upon retirement.
Taxation
The biggest difference between the Swiss and US Social Security system is taxation during the years of contributions and distributions.
In Switzerland, contributions reduce your income and, therefore, your overall Swiss tax liability. When you retire and receive distributions, they will be fully taxed at your ordinary income tax rate. The applied tax rate is often lower than it would be at the time you made the contributions, as your overall income may be lower in retirement.
In the US, contributions do not reduce your income and therefore are fully taxable. When you retire and receive distributions, up to 85% of your US distributions may be taxable, leaving 15% or more as tax-free income.
Retirement
Swiss full retirement is reached at age 64 for women and 65 for men. You have the option to receive early distributions up to 2 years before retirement or defer them for up to 5 years. Through receiving early distributions, your future benefits will be permanently reduced, while deferring will result in a higher benefit in future years.
You must apply to start receiving distributions, either at full retirement age, when you wish to receive early distributions or for deferment.
US full retirement age has been slowly increasing over the years and currently stands at 67 for both men and women. You have the option to receive early distributions starting at age 62 or defer until age 67. The same rules apply, as early distributions permanently reduce future benefits, and deferring results in a higher future benefit.
Early Retirement
If you choose to retire more than two years before reaching full retirement age in Switzerland, you will still be required to make AHV/AVS contributions while you are not employed. The required contributions can range from CHF 41.90 to CHF 2,095.80 per month. The exact amount you need to contribute is uniquely calculated based on your net worth and other income sources.
In the US, the minimum contribution period to qualify for distributions is 40 quarters (or 10 years). If you stop working, you are not required to continue making contributions, but will receive a reduced benefit upon retirement.
Distributions
As of January 1, 2022, the minimum Swiss social security annuity is CHF 1,195 per month, and the maximum is CHF 2,390 per month. For married couples, the maximum benefit is CHF 3,585 per month. These distribution amounts are based on ‘complete contributions’, which mean you made contributions for the entire contribution period (43 years for women, 44 years for men). For each missed year, there will be a reduction in the distribution.
In the US, the maximum amount of Social Security distributions an individual could receive at current full retirement age (age 66 and 2 months in 2022) is $3,345. A married couple who both meet the requirements for a maximum distribution do not receive a reduction in the amount received.
US-Swiss Social Security Totalization Treaty
The US and Switzerland have a totalization treaty in place, which is intended to protect individuals who work between the two countries. It allows you (and your employer) to avoid mandatory contributions to both pension systems. This does not apply to US Medicare coverage, unfortunately, as it was not included in this treaty.
If you spent your career working in both the US and Switzerland, there is a high likelihood that your US social security distributions will be reduced. This is due to the Windfall Elimination Provision (WEP). This does not apply to any distributions received through the Swiss pension system, as it is not reduced in this provision.
Calculating Your Distributions
For Switzerland:
AHV/AVS Online Pension Calculator - This online calculator will provide a good estimate. If you have worked at least one full year in Switzerland and otherwise qualify, you will not receive a reduction in distributions.
For the United States:
US Social Security Administration (SSA) - If you are in the US or have a valid US address, you can create an account to view your US Social Security Statement. This statement is helpful for those looking to learn about their future Social Security benefits and earnings history.
Form SSA-7004 "Request for Social Security Statement" - If you are living abroad and do not have a US address, you will need to submit the above form to receive your Social Security Statement.
A reduction in US social security distributions due to WEP is not included in the above statement. The Social Security Administration (SSA) provides a WEP Calculator which can help determine this reduction.
Summary
Spending your career working in both the US and Switzerland can be extremely rewarding but requires additional planning when it comes to retirement. Due to the differing contribution periods, Windfall Elimination Provision, and US-Switzerland Totalization Treaty, there are numerous factors to consider when calculating your expected benefits. Make sure to speak with your financial planner and US tax advisor, as optimization revolves around your unique experiences.
It is important to note that if you plan on retiring in the US, you must work there for at least 10 years to be eligible for US Medicare. Otherwise, plan to purchase additional health insurance coverage.
Meet the Author
Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent with Connected Financial Planning. She's spent over a decade working with US expats on US tax and financial planning issues. She is passionate about working with US expats and their families to help secure their financial future reflective of their core values. Arielle grew up in New York and has lived throughout the US, Germany and Switzerland.
Resources/References
IRS - US-Switzerland Totalization Treaty:
https://www.ssa.gov/international/Agreement_Pamphlets/switzrld.html
AXA - Pillar 1:
https://www.axa.ch/en/pension/pillar-1.html
Deloitte - Switzerland Social Security Rates (2021):
https://blogs.deloitte.ch/tax/2020/12/switzerland-social-security-contribution-rates-increase-as-of-1-january-2021.html
AHV/AVS - Pension Forecasts:
https://www.ahv-iv.ch/p/3.06.e
AARP - What is the maximum Social Security benefit:
https://www.aarp.org/retirement/social-security/questions-answers/maximum-ss-benefit.html
AHV/AVS - Non-employed contributions:
https://www.ahv-iv.ch/p/2.03.e