Understanding Switzerland’s Tax System Part 3: Social Security and family allowances
Articles about Switzerland
Switzerland: Understanding Switzerland’s Tax System Part 3: Social Security and family allowances
This writing belongs to a series of articles that I am planning to write about the country of my current residence. You can find the links to my previous articles at the end of this document.
This article is the third one about the Swiss tax system and taxation. This time, I briefly introduce the occupational pension scheme-related part of the social security system in Switzerland. There are few words about family allowances in the taxation too.
In many other countries, the occupational pension scheme is quite tightly connected with income tax. In Switzerland, this is not the case, and the occupational pension scheme cannot be considered a part of the regular income tax system. Contributions to the scheme are tax-deductible, and benefits are taxed upon withdrawal. However, I am still writing a short article about the taxation of occupational pension schemes, as it is ultimately a mandatory payment in addition to work-related income.
Social Security and family allowances
Social Security
As social security is not directly included in income taxation, it deserves a few words here. The Swiss social security system is based on three levels, called "Pillars." The 1st and 2nd Pillars are mandatory, while the 3rd Pillar is optional.
1st Pillar ("AHV/AVS"): This is the state pension and provides basic financial security. Contributions to the 1st Pillar do not accumulate in an individual account and cannot be inherited. The contribution rate for the 1st Pillar is 10.6% of your salary, shared equally between the employer and employee (5.3% each). There is no maximum contribution limit for high earners.
2nd Pillar ("BVG/LPP"): This is an occupational pension plan provided by employers to maintain the standard of living in retirement. Contributions are based on a percentage of the insured salary, which typically ranges between 7% and 18% depending on the employee’s age. The maximum insured salary for the 2nd Pillar is CHF 86,040 per year, with the minimum threshold for mandatory contributions set at CHF 21,510 per year. Savings in the 2nd Pillar can be inherited, but the rules and beneficiaries depend on the pension fund’s regulations and the relationship to the deceased.
3rd Pillar: This consists of private, voluntary savings to supplement the 1st and 2nd Pillars. The third pillar includes voluntary private savings and is subdivided into Pillar 3a (tax-privileged) and Pillar 3b (non-tax-privileged). The maximum annual contribution to Pillar 3a is set at CHF 7,056 for those with a second pillar and up to 20% of net income (capped at CHF 35,280) for those without. Unlike Pillar 3a, Pillar 3b allows unlimited contributions and is inheritable, providing flexibility in designating beneficiaries. There are in some cases certain rationalities to invest more in Pillar 3b instead of making direct investments elsewhere.
Contributions to the 1st and 2nd Pillars reduce taxable income directly, as they are mandatory deductions from gross salary. Contributions to Pillar 3a also reduce taxable income, noting the specified limits. When comparing the income tax percentage with other countries' systems, you must also include these contributions in your calculations to make the income tax percentage comparable.
Please note: Under certain conditions, early withdrawals from the 2nd and 3rd Pillars are possible, such as for purchasing a primary residence, starting a business, or permanently leaving Switzerland. Additionally, 2nd and 3rd Pillar savings can be used as collateral for mortgage loans, making it easier for individuals to invest in housing. This system offers more flexibility and direct use of pension funds for personal investments compared to many other European systems, which often have stricter regulations regarding early withdrawals and the use of pension savings.
A significant benefit of the Swiss pension system is that it provides individuals with a greater sense of ownership over their saved money compared to systems in countries like Germany and Finland. The transparency of the system ensures that assets are more distinctly "yours." The system strongly supports saving, and these savings are your own.
Family Allowances
Swiss families can receive child allowances of at least CHF 200 per month per child. In some cantons it is even about CHF 300 and sum may be higher for the second or third child.
Some cantons have education allowances for children aged 16-25 who are still in school or apprenticeships. There are also one-time birth allowances, which can range from CHF 1,000 to CHF 3,000. For children in education, allowances are at least CHF 250 per month and can be higher in some regions
Education and Birth Allowances:
Switzerland offers 14 weeks of maternity leave but paternity leave is limited to just two weeks. This is relatively low compared to other European countries.
Again, generally speaking family support in taxation and other governmental benefits is slightly lower in Switzerland compared with other European countries. Public spending on family benefits as a percentage of GDP is relatively low. Length of the maternity leave and paternity leave, can be considered as less generous than elsewhere around. Tax reliefs for families in Switzerland is available too, however they less extensive than those provided in countries with more progressive tax.
Summary
The Swiss social security system, in my opinion, offers a more transparent and flexible approach to retirement savings. For instance, you can use it as collateral for investments. What makes it particularly unique is that the system ensures a stronger sense of ownership over saved money and supports individuals in building their financial security. However, Family support is less generous than in neighbouring countries.
Again Your thoughts and suggestions in the comments would be greatly beneficial.