info suisse Fall 2016
Banking / Financial | Law | Switzerland-Canada Comparisons
December 2016

Public Pension Systems in Canada and in Switzerland

(Kurt Schläpfer)
While Canada’s Finance Ministers have recently agreed to improve the Canadian pension system, a citizen-initiated referendum was held in Switzerland dealing with the same goal of increasing the Swiss public pension called AHV. These national efforts give rise to look more closely at the existing social security systems in both countries.

Most countries offer either a state pension or a social pension or both for their citizens when they retire. The typical characteristic of a state pension is that all employees and employers have to pay a percentage of salaries into this system, and the pension paid to a person depends on their contribution history. Social pensions, however, are paid to older people regardless of income, assets or employment. Over 80 countries including Canada and Switzerland offer social pensions.

This article focuses only on public pension systems and does not cover other sources of retirement income such as occupational pension plans. To keep the article easyto- read, the many exemptions in these systems are not mentioned.

Canada

In Canada, there are two main pension programs that provide benefits to retired people, i.e. the Old Age Security program (OAS) and the Canada Pension Plan (CPP).

The Canada Pension Plan (CPP) is a form of retirement income that is open to all Canadians who have worked and paid into the system through deductions from their salaries. The amount a person receives under the system depends on how much and for how long a person contributed. The maximum CPP payout is $934 per month at age 65. If the annual salary is less than $54,900, this will result in a reduction of the final benefit amount. The CPP contribution is deducted from the employee’s earnings and amounts to 4.95 %. The employer is obliged to contribute an equal amount, totalling the CPP contribution to 9.9 %. Self-employed people must contribute 9.9 % of their net business income. A person can begin receiving CPP any time after age 60, but the CPP payout will be reduced. On the other hand, for each month after age 65 the benefit will increase. Earnings less than $3,500 per year are automatically exempt from CPP contributions.

The Old Age Security (OAS) program is the Government’s largest pension program and funded out of the general revenues of the Government of Canada, meaning that nobody has to pay into it directly. To qualify for a full OAS pension, a person must be resident of Canada for at least 40 years after turning age 18, and continuously for the 10 years immediately before the approval of the OAS pension. The maximum OAS pension is $573 per month. Unlike CPP, most people get the maximum, because it is based solely on residency. The government claws back OAS payments from high-income Canadians. If the income is higher than $70,954, the government will reclaim part of the OAS payment, currently 15 cents for every dollar of income above the $70,954 threshold. That means that if an annual retirement income is higher than $114,640, the OAS payout will be reduced to zero.

In addition to regular Old Age Security benefits, there is the Guaranteed Income Supplement benefit (GIS). The GIS provides benefits in addition to the OAS pension, to seniors whose income or combined income with their spouse is very low. The maximum GIS amount is $856 per month, if the recipient has no retirement income.

Switzerland

In Switzerland, everyone is entitled to an old-age pension from the Old-Age and Survivors Insurance, better known under the Swiss abbreviation AHV. The AHV is a combination of state and social pension. Men, at 65, and women, at 64, are entitled to this old-age pension. Payouts may be started two years earlier or can be postponed up to five years, which leads to a corresponding decrease or increase in payments. If an insured person dies, any dependent family members will receive a survivor’s pension.

The minimum AHV pension is CHF 1,175 per month, if the average annual income is not higher than CHF 14,100. For instance, if a person never earned more than CHF 1,000 per year, the monthly AHV pension is still CHF 1,175. In this respect, the AHV is truly a social pension. Above an annual income of CHF 14,100 the AHV pension depends on the contributions paid and reaches a maximum amount of CHF 2,350 per month. As in Canada, AHV contributions are deducted from the employee’s salary, the rate in Switzerland being 5.125 %. Together with the employer’s amount the total CPP contribution is 10.25 %. 

If a person obtains an AHV pension and his income does not cover basic needs, he is entitled to supplementary benefits (Ergänzungsleistungen). To be eligible, a certain number of legal requirements have to be fulfilled. There is no maximum limit for supplementary benefits. Typically, the monthly amounts paid can vary between CHF 2,000 and CHF 3,000.

On September 25, 2016, a citizen-initiated referendum was held under the name “AHV plus” demanding that the current AHV pensions be increased by 10 %. According to the initiators of the referendum, a higher AHV pension is necessary, because people on low incomes rely on receiving a higher retirement income. As this referendum faces serious problems for the Swiss state finances, neither the Federal Council nor the national Parliament can see any financial way of increasing the AHV pensions. In the vote on September 25, nearly 60 % of voters rejected the referendum. The Swiss government welcomed the result, with Interior minister Alain Berset commenting “The people have understood the major hurdle we are facing of creating a stable first pillar”. 

Comparison between Canada and Switzerland 

A direct comparison between the Canadian and the Swiss pension systems is difficult, because the calculation basis is very different in the two countries. Nevertheless, an attempt is made to present some comparative figures. The basis for the calculation are the average employment earnings per year (in Canada below a maximum cap) between the age of 20 and 65. It is also assumed that this average salary is also the retirement income at the age of 65 for a single person without any other assets. The comparison shows that the pensions paid to old-age people are more or less comparable in the two countries. However, it is interesting to note that Canada pays higher pensions than Switzerland to people with a low retirement income and vice versa. And it may be added that old-age people in Switzerland who do not qualify to receive an AHV pension obtain supplementary benefits (Ergänzungsleistungen).

* Source: Homepage of the Government of Canada
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