Why the Swiss 3 pillar system is not enough insurance

The Swiss are rightfully proud of their 3 pillar social security system. It is a world-class offering and has a lot of built-in protection for Swiss citizens. Nonetheless it is not perfect as it might leave your loved ones unprotected in case something unfortunate happens to you.

In fact, it has such a good reputation among the general population that it allures people into a false sense of security. Before we elaborate on this false sense of security, it’s important to understand what the Swiss 3 pillar system is and how it works.

What is the Swiss 3 Pillar System

The Swiss Three Pillar System is split into three different layers of monetary security. Each pillar has a different purpose and is supported by a different institution within Switzerland. The intended aim of this system is to provide a financial safety net that allows you to continue your living standard post retirement.

  1st pillar 2nd pillar 3rd pillar
Aim Safeguard basic income level (actually barely covers poverty line) Continuation of normal living standard (actually 60 – 70% of last salary) but can be less in many cases Top-up of benefits (to make up the short fall from pillars 1 and 2)
Supported by? AHV: Old-age and survivors' insurance
IV: Disability insurance
SB: Supplementary benefits
BVG: Federal Law on Occupational Retirement, Survivors' and Disability Plans Individuals via
3a: Restricted pension plan
3b: Unrestricted pension plan
Who pays? Pillar 1 is compulsory for everyone who resides or works in Switzerland. It covers basic subsistence needs in old age, provides you with insurance in case of invalidity and protects your surviving dependents in the event of death. Supplementary benefits are only paid out under specific circumstances. The occupational pension is compulsory for all employed persons with a yearly income of at least 21'150 Swiss francs (2018). Pillar 2 is intended to secure the accustomed standard of living. In combination with pillar 1, it should comprise around 60 to 70 percent of your last salary. Anything beyond this must be covered by private retirement provision. Pillars 1 and 2 often aren’t enough to sustain your accustomed standard of living in old age. Pillar 3 lets you close that gap. Payments are voluntary but you’ll also save on taxes with pillar 3a because you can deduct the payed-in amounts from your taxable income.


Gaps in the 3 pillar system

Though formidable as an idea, the Swiss 3 pillar system does not fulfill the promises it lists for a large part of our society. In fact, the design of the system is such, that pillars 1 and 2 together provide around 60-70% of your last salary. If you are self-employed, you are only covered by the first pillar (as the 2nd pillar is not compulsory as would be the case when employed). This means that in case of death, your loved ones will receive limited benefits that will allow for a basic income that barely surpasses the poverty line.

For non-married couples with children, gaps can be even larger and financially problematic as the surviving partner often has no right to a widower’s pension. These are mereley some of many examples where coverage or protection gaps exist within the Swiss three pillar system.

To make sure that your loved ones don’t suffer, you need to determine how much they would receive from your first two pillars in case the unthinkable should happen. If an assessment determines a protection gap we recommend getting some additional protection in the form of pure life insurance. In addition, it is also advisable to start saving in the 3rd pillar in order to offset any protection gaps. In fact, pure life insurance and saving are two sides of the same coin.

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