## _cr05188 — References (selected chapter summaries) ## Source details **Canonical URL:** [_cr05188 — References (selected chapter summaries)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05188.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05188.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05188.pdf.json) --- ### Introduction and summary - Short-term fiscal position improving; long-term outlook challenging because of population aging. - 2004 structural deficit estimated at 0.7 percent of GDP; public debt stands at 56 percent of GDP. - Switzerland has one of the lowest rates of output growth; aging may reduce growth further. - Official projection highlights: - By 2040: 550,000 more persons over 65 and 480,000 fewer persons of working-age than today; worker-to-elderly ratio falls from 3.2 to 1.8. - Aging peaks around 2035; policies should be calibrated well before that peak. - Economic and social effects of aging: - Shrinking working-age population lowers GDP growth unless offset by participation, immigration, or productivity. - Expansion of social services (low productivity) could lower overall productivity growth. - Older electorates (voters over 50) becoming a majority sooner may slow reforms. - First-pillar (pay-as-you-go) finances strained: pensions, health, long-term care rising faster than revenue; high income elasticity of health demand and above-average price increases exacerbate strain. - Risk of retirees running down assets depressing asset prices and straining funded pensions and public guarantees (magnitude uncertain). - Some corrective measures (e.g., raising payroll taxes) could discourage labor supply and lower GDP growth. - Main quantitative findings: - Impact of aging moderate so far; main impact after 2015. - Aging projected to reduce annual growth from around 1½ percent to ¾ percent a year in about a decade absent productivity-boosting reforms. - Under current policies, first pillar expected to generate persistent primary deficits peaking at 5 percent of GDP around 2035, raising debt to 250 percent of GDP. - Immediate permanent fiscal adjustment of 3 percent of GDP needed to prevent imbalance; required adjustment larger if delayed. - The debt brake focuses on current federal debt and abstracts from present value of future deficits, thus not capturing full aging challenge. ### Demographic outlook and international context - Drivers: increasing longevity, declining fertility, bursts in immigration, baby-boom cohort. - Life expectancy and fertility: - Life expectancy increased by 9 years since 1960; currently second only to Japan. - Fertility rate declined to 1.5 (in line with EU average). - Immigration and foreign-born share: - Foreign-born share rose from 15 to 20 percent (one of the highest among industrial countries). - Key features: - Full force of aging felt from 2015 onward. - Since 1990: number of pensioners increased by 35 percent; persons over 65 increased by 17 percent. - Early retirement less prevalent than in other industrial countries. - By 2040 baby-boomers crowd top cohorts; population projected to grow until mid-2010s then decline cumulatively 18 percent to end of century. - Working-age population projected to peak around 2010 then decline cumulatively 28 percent; share of working-age population falls from 68 percent to 61 percent between 2005 and 2060. - Dependency rate not projected to improve until after 2070. - Uncertainty: - Long-term projections subject to substantial error; BfS high-low range for population is 2.2 million persons and for working-age population 1.3 million persons. - International comparison: - Swiss shift similar to other mature economies; decline and dependency rise high but less pronounced than Germany and Austria; life expectancy significantly higher than other countries. ### Growth impact — Baseline: "The Best Years Are Behind" - Baseline projections: - Potential growth drops from 1½ percent currently to ¾ percent a year after 2020, mainly from slowing labor input. - Capital deepening and technological progress keep labor productivity growth just over 1 percent (close to historic average). - Population decline and rising old-age dependency reduce total hours worked and shave almost 0.2 percentage point off GDP growth. - Participation already high; immigration not relied upon to sustain growth. - Labor input components and assumptions: - Hours = population × share of working-age population × participation rate × employment rate × average hours worked. - Population projected to start declining around 2025; total population projected to decline by a cumulative 2.8 percent between 2005 and 2060 despite a 9 percent increase in immigration. - Share of foreigners rises from 20 percent to 22.8 percent over 2005–2060. - Working-age share projected to decline from 68 percent to 61 percent between 2005 and 2060. - Participation rate projected to rise near term (female labor force, early retirement dissipates); after 2010 no further contribution expected. - Employment rate rising toward NAIRU estimated at 2.3 percent; limited further gains expected. - Average hours worked declined since 1970; small further decline until 2020 and constant thereafter. - Capital and TFP: - Constant real investment rate assumed at 18 percent of GDP; depreciation rate 5 percent. - TFP assumed to grow by just under 1 percent a year; historical TFP: 0.5 percent (1970-81), 0.4 percent (1982-94), 0.9 percent (1995-2004). - TFP risks balanced: downside from aging/low-productivity services; upside from EU agreements, opening sheltered sectors, IT productivity lag. - Production function and elasticity: - Two-factor Cobb-Douglas with labor elasticity θ = 70 percent. - Relation used: Ŷ = Ĥ + (1/θ) Â. - Baseline quantitative outcomes: - With TFP growth 0.7 percent, θ = 70 percent, labor productivity grows 1 percent a year; population and hours decline 0.2 percent a year. - Average GDP growth 0.8 percent over 2010–60. - Robustness range: long-run average growth between 0.5 percent and 1.2 percent. - Specific scenario impacts: - Increasing retirement age by 3 years (phased over 12 years) raises GDP level by 7 percentage points by 2060 (0.1 percent additional growth a year on average) but does not change long-term growth rate. - Raising investment rate from 18 to 23 percent raises average growth to 1.0 percent a year and raises GDP level by 10 percentage points by 2060. - Raising TFP growth by 0.3 percentage point raises GDP growth by 0.4 percentage point (0.8 percent → 1.2 percent). - High population scenario raises average growth to 1.1 percent (2010–2060); low population scenario reduces average growth to 0.5 percent. - Immigration assumed to continue until 2020 and raise foreigners share from 20 to 23 percent in baseline. - Caveats: - Projections abstract from interactions among growth, fiscal position, and policies; adverse fiscal developments or policy responses could reduce investment and growth. ### Public finances: current situation and projected pressures - Social security pressures driven by aging, pension generosity, and rising health-care costs. - First pillar pensions (AHV + IV): - Running deficits despite earmarked VAT increase. - Deficit more than doubled in percent of GDP since early 1990s; projected to reach 2.7 percent of GDP in 2005. - Main reason: greater propensity for early retirement and disability pensions; population aging not yet a large impact. - Health care: - Public expenditure for health care projected to reach 2.8 percent of GDP in 2005. - Co-payments rose to an effective rate of nearly 13 percent of household expenditure from 7½ percent in early 1990s, tempering fiscal impact. - General government balances and debt: - Primary surplus before transfers to social security averaged 6 percent of GDP in 2000–05, resulting in overall primary surplus of 0.6 percent of GDP. - Gross debt at end-2004 was 56 percent of GDP (50 percent in net terms); debt ratio nearly doubled since early 1990s due to very low nominal GDP growth. - Proceeds from sale of excess gold reserves in 2005 could reduce public debt by up to 4.6 percent of GDP (treated as a potential one-off effect). ### Projected fiscal outcomes under current policies - By 2040 the social security primary deficit projected to have deteriorated by 5½ percentage points of GDP from current level. - Only ½ percent of GDP of the increase in social security primary deficit will be offset by general government primary surplus. - Widening overall primary deficits project public debt ratio to reach 265 percent of GDP and overall deficit 10 percent of GDP in 2060 (under assumptions of unchanged interest rates and unimpaired credit rating). - Present value of future primary deficits equivalent to 170 percent of GDP. - This implicit unfunded liability is additional to registered net public debt of 45 percent of GDP (including gold sale proceeds). - Projections assume gold sale proceeds (4.6 percent of GDP) used to lower debt. - Baseline interest assumption: nominal interest rate set at 0.4 percentage point over nominal GDP growth (average differential past 20 years). - General government runs structural primary surplus (excluding transfers to first pillar and health care) of 6 percent of GDP (base-year level adjusted for ongoing consolidation). - First-pillar benefits grow at half the rate of productivity growth; early retirement and disability incidence decline after 2015. - Health expenditure per insured person grows faster than productivity due to unit income elasticity, faster price growth, and aging; health assumptions more optimistic than those in accompanying health chapter. ### Size and nature of required fiscal adjustment - To restore net debt to 45 percent of GDP by 2060, general government must raise permanently from 2007 its primary surplus to 4⅓ percent of GDP. - Implies an overall general government surplus of 1.7 percent of GDP on average in 2007–20. - Policy instruments equivalent to required adjustment: - Raise basic VAT rate by 5½ percentage points to 13 percent. - Increase income tax revenue by 35 percent. - Cut consolidated government expenditure by 9½ percent across the board. - Raise contribution rates by 6⅓ percentage points. - Other measures that reduce required adjustment include raising effective retirement age, reducing pension indexation, better linking pensions to lifetime earnings. - Delaying adjustment by ten years raises required primary balance adjustment by 0.9 percentage point of GDP; VAT restoring sustainability under ten-year delay would need to be 14.2 percent (1.2 percentage points higher than immediate-adjustment scenario). - Limit exists to timing-size trade-off; adjustment should occur before debt reaches market-sensitive levels. - Debt-brake rule: - Stabilizing current debt ratio requires growing primary surpluses to offset social security operating deficit; by 2035 primary surplus would need to rise by 6 percent of GDP above current level. - Debt-brake helpful but would not prevent painful adjustment if applied only at general government level. ### Sensitivity and robustness - Contingent liabilities (guarantees for pension funds) could add 5–10 percentage points to debt ratio; privatization revenue could offset some. - Changing interest–growth differential (ζ): increasing differential from 0.4 to 1.0 percent reduces required instantaneous primary surplus increase from 3.7 to 3.9 percent of GDP but eventually raises deficit and debt beyond 10 percent and 300 percent of GDP respectively. - Pensions sensitivity: early retirement incidence and indexation rules critical. - Health care sensitivity: income elasticity and differential between health care and overall inflation materially affect outcomes; companion health paper projects public subsidies could grow by 8 percentage points of GDP through 2050 under unchanged policies. - If primary structural surplus lower than baseline 0.4 percent of GDP, required fiscal adjustment must be larger. - Underfunding in second pillar (defined-benefit plans) could burden public finances through public guarantees and social safety-net demands. ### Policy options and recommendations - Overall strategy: combine benefits rationalization, structural reforms to boost growth, and fiscal adjustment. - First-pillar benefits rationalization: - Remove incentives for early retirement; create incentives to work longer. - Align statutory retirement age with rising life expectancy. - Reduce replacement rate; reduce wage weight in pension indexation formula and/or lower frequency of pension adjustments. - Means-test benefits and strengthen safety net for low-income pensioners. - Phase changes gradually and use actuarially fair adjustments for early/late retirement. - Reassess role of first pillar vs. fully funded second pillar; consider limiting first pillar to basic needs and relying on private saving/returns for replacement incomes. - Health care cost containment: - Harden budget constraints (e.g., condition new facility investment on local financing). - Consolidate infrastructure, reduce fragmentation. - Increase co-payments where appropriate. - Increase competition in services and liberalize pharmaceutical/generic imports. - Structural reforms to raise productivity and employment (SECO 2004 agenda); immigration can boost output and first-pillar finances but entails integration costs. - Fiscal adjustment emphasis: tilt toward expenditure containment; limited scope to raise income taxes due to tax competition; higher payroll taxes could lower growth; moderate VAT increases possible. - Authorities proposed phased VAT rise of cumulative 2.5 percentage points, rejected in referendum. - Fiscal framework reforms: - Strengthen intergovernmental cooperation; current first-pillar financing sharing diffuses responsibility. - Supplement three-year rolling federal plan with long-term fiscal sustainability plan capturing aging effects. - Prepare comprehensive periodic social security financial reports with horizon capturing aging effects (peak around 2040). ### Concluding assessment - Without policy changes, population aging expected to hamper growth and generate long-term fiscal pressures. - Delays make solutions harder; phasing in adjustment involves social time preferences, intergenerational equity, and political economy trade-offs. ### Fiscal policy framework: fine-tuning needs - Key finding: fiscal framework needs fine-tuning via: - A forward-looking target path for public debt. - Improved coordination of fiscal policies among the various levels of government. Appendices (models, metrics, and data used in projections) - Growth model: Cobb-Douglas production function with notation: - Yt = At · (ut · Ct)1-θ · Htθ = (ut · Ct)1-θ (Bt · Ht)θ - TFP growth At = (1+ Â ) · At-1; capital Ct = (1-δ) · Ct-1 + i · Yt-1. - Hours Ht = Lt · ht; employment Lt = (Population)t · (activity rate)t · (participation rate)t · (1-URt). - Output growth decomposition: Ŷ = (1/θ) Â + Ĥ. - Fiscal sustainability framework: - One-period government budget constraint and debt dynamics preserved in ratios; present-value decomposition of primary deficits into general government and social security components. - Definition of sustainability per Blanchard (1990) and measures of fiscal imbalance: [(1+ζ)-n · dn − d0]. - Caveats on discount factor ζ and sensitivity of PV metric. - Pension projection framework: - Pension expenditure formula: E = a · I / (p · Y) = (a · p-1 · y-1) · i · ξ, with 2004 ceiling SwF 2110 per month and replacement rate for average earner = 45 percent. - Drivers: average pension growth, share of pensioners among elderly, old-age dependency ξ; historically old-age and survivor pensions rose 2.7 percent annually (1980-2003); disability pensions 2.6 percent; GDP deflator 2.3; labor productivity 0.4. - Revenue formula: R = c · W · B / (p · Y) + v · h. - Health projection framework: - Health expenditure formula: E = h · (I / POP) · (POP/E) / (p · y) = (h p-1 y-1) · i · e-1. - Revenue R = c · (I / POP) · (POP/E) / (p · y) = (c p-1 y-1) · i · e-1; operating balance E – R drivers preserved. - Projection assumption: contribution rate and government subsidy (percent of GDP) remain unchanged. - Data sources and parameter values: - Population/working-age: OECD ADB until 2000; from 2001 growth rates set to BfS baseline. - Unemployment projected to decline to NAIRU = 2.3 percent by 2010. - Investment = 18 percent of GDP; depreciation = 5 percent. - Capacity utilization, hours, capital stock construction, and other parameter specifications preserved as in appendices. ### Switzerland’s health care system (chapter highlights) - Performance and spending: - Life expectancy 80½ years (second to Japan); infant mortality twice that of best performers. - Switzerland spends 11.5 percent of GDP on health care (second-highest after United States at 14.6 percent). - Health share rose from 5.4 percent of GDP in 1970 to 11.5 percent (steepest increase in OECD). - Real per-capita health spending growth below OECD average; high health-to-GDP mainly reflects slow GDP growth (denominator effect). - Supply-side distortions (four core problems): 1. Regional fragmentation: - Constitution assigns provision to cantons; proliferation of hospitals; third-highest hospitals per capita in OECD. - Operating costs of public/subsidized hospitals fully reimbursed by compulsory insurance and cantons, removing cost-control incentives. - High physician density concentrated in cities; insurers must cover treatment by every doctor. 2. Financial fragmentation: - Three institutions finance care: private insurers (KV), public accident insurance (UV), disability insurance (IV). - Blurred scheme boundaries allow shifting patients between schemes; IV growth suggests use for early retirement. 3. Supply-induced demand: - Provider market power from information asymmetries; supply-induced cost inflation evidenced by high nurse and imaging equipment per capita and second-longest hospital stays. - Correlation between physician density and per-capita costs across cantons. 4. Insufficient pharmaceutical competition: - Elevated drug prices linked to past cartel activity (Sanphar); parallel imports illegal; Switzerland acts as high-price testing ground. - Financing and equity: - Three-quarters of costs financed by private sector; 40 percent of private costs covered by insurers; 34 percent paid out-of-pocket (co-payments). - Switzerland has highest private co-payments percentage in OECD; OECD average 13 percent. - Average private health bill > SwF 5,000 per individual in 2002. - Subsidies: ensure premia do not exceed about 13 percent of household income; 33 percent of households received subsidies in 2004 (regional range 23–60 percent). - Confederal lion’s share of subsidies; cantons top up but sometimes under-disburse. - Fiscal burdens and simulation outcomes: - Simulations suggest additional expenditures could amount to 8 percentage points of GDP by 2050. - General-equilibrium assumptions: - Quantity and price parameters evolve as past decade. - Income elasticity of quantity = 2. - Health prices rise 0.25 percentage point faster each year than GDP deflator. - Main cost pressure from rising old-age dependency in 2010–35. - Distributional results: - Without higher subsidies, simulated Gini rises from 28.5 to 33.5. - To hold private burden at 13 percent of household income, subsidies needed; share of subsidy recipients projected to rise to 41 percent in 2008, >60 percent in 2015, and around 90 percent by 2050. - Fiscal cost projections: - Subsidies rise from 3 to 4 percent of GDP during present decade; accelerate after 2010. - By 2050, fiscal spending on health care more than 8 percentage points of GDP higher than today. - Macroeconomic impact of tax financing: - Tax increases up to 8 percentage points of GDP (to finance subsidies) could slow annual GDP growth by more than 0.3 percentage points per year. - Cumulative GDP level loss by 2050 could be 7 percentage points compared with no tax increases. - Policy implications: - Address market distortions: reduce regional fragmentation, strengthen Confederation regulatory powers, limit automatic reimbursement, reform financing to reduce incentive to shift risks into public schemes. - Foster pharmaceutical competition and liberalize imports. - Increase government cooperation across levels to implement reforms. ### Political economy, direct democracy, and reform timing - Referenda frequency and turnout: - Number of federal referenda increased from "10 or 20 per decade" early 20th century to "around 140 per decade"; including cantonal/local easily doubles. - Voter turnout usually less than 50 percent and stable since 1960s. - Federal structure: - Federal government accounts for less than a third of public spending; cantons handle economic regulation, education, health care, judiciary; communes have fiscal independence. - Political variables: - Four largest parties govern in coalition; combined federal-and-cantonal majority usually ~85 percent of seats, falling to 76 percent mid-1990s. - Party ideology indexed 1–7 left-right shows no long-term trend; multimodal distribution and weak center. - Polarization increased (1970–2004); variance of left-right index rose stepwise. - Polarization is procyclical: Granger causality tests (1970–2004): - Change in Polarization → Output Gap: F-Statistic 2.78, Probability 0.0795. - Output Gap → Change in Polarization: F-Statistic 13.19, Probability 0.0001. - Fiscal adjustment and political economy regressions (1970–2004; Adj. R2 = 0.60; dependent variable: Fiscal impulse): - Output gap coefficient 0.21, t-Statistic 3.28. - Unemployment rate (t-1) coefficient −0.38, t-Statistic 3.79. - Ideology coefficient −2.86, t-Statistic 3.25. - Majority coefficient 4.65, t-Statistic 1.74. - Polarization coefficient 4.70, t-Statistic 3.83. - Interpretation: shift right (ideology) favors adjustment; polarization impedes expenditure control. - Structural reform indicator regression (1970–2004; Adj. R2 = 0.76; dependent variable: reform indicator): - Unemployment rate coefficient 2.14, t-Statistic 4.19 (pressure for reform). - Majority coefficient −45.51, t-Statistic 4.69; Polarization coefficient −15.34, t-Statistic 2.50 (large majority and polarization detract from reforms). - Timing lesson: - Significant reforms adopted under economic pressure when political climate favors compromise (mid-1990s); once enacted, reforms are hard to reverse. - Current mix of economic expansion, polarization, and internal government stress complicates fiscal adjustment and reform. - Debt brake institutional reform has upheld fiscal discipline in its first three years and shifted some adjustment into upturns. ### Financial system characteristics (international comparison) - Scale and importance: - Bank and investment-fund assets and custody assets total ~15 times Swiss GDP. - Financial services value added = 13.6 percent of GDP. - Sector employs >190,000 people (4.5 percent of employment). - Swiss banks manage ~one third of all private assets invested across borders. - 83 percent of assets under management and 56 percent of custody assets belong to foreign investors; virtually all assets under management invested outside Switzerland. - Market structure and income composition: - Banking sector highly concentrated; number of banks fell 17 percent between 1990 and 2004. - Banks derive large share of income from fees and commissions; fees/commissions as percent of gross income shown at 34.6 percent in chart (Switzerland among highest). - Prudential and balance-sheet metrics (2002–2004 series preserved): - Regulatory capital to risk-weighted assets: 12.1, 11.2, 11.0. - Tier I to risk-weighted assets: 12.6, 12.2, 11.6. - Non-performing loans net of provisions as percent of Tier I: 23.3, 16.5, 12.1. - Non-performing loans as percent of gross loans: 3.1, 2.3, 1.6. - ROAA: 1.1, 0.9, 0.9. - ROAE: 18.3, 16.0, 16.7. - Liquid assets as percent of total assets: 21.6, 21.6, 27.0. - Liquid assets as percent of short-term liabilities: 47.9, 52.9, 54.9. - Capital as percent of assets: 5.4, 5.2, 5.0. - Household debt as percent of GDP: 85.7, 88.5, 90.1. - Real estate price annual increases: 2.8, 2.3, 2.3. - Mortgage loans as percent of total loans: 69.9, 71.5, 69.7. - Insurance and pensions: - Insurance assets SwF 530 billion = 122 percent of GDP in 2003; premiums SwF 51.6 billion (62 percent life insurers). - Annual premium volume SwF 7,000 per capita (private direct insurance only). - Group premiums: 70 percent generated abroad; reinsurance turnover 95 percent abroad. - Pension funds underfunding and share of underfunded funds series preserved in source. - Operational and reputational risks: - Banks vulnerable to operational and reputational risk due to service profile. - Swiss prudential requirements stricter than Basle II proposals to protect operational/reputational integrity. *Italic: IMF staff report (content unit: _cr05188).* ### References.............................................................................................................. ### _cr05188 - References.............................................................................................................. ### Introduction and summary - Switzerland’s short-term fiscal position is improving, but, because of population aging, the long-term outlook remains challenging. - 2004 structural deficit is estimated at 0.7 percent of GDP and public debt stands at 56 percent of GDP. - Switzerland has one of the lowest rates of output growth and this may decline further as population aging progresses. - Official projections suggest that by 2040 there will be 550,000 more persons over 65 and 480,000 fewer persons of working-age than today; this swing of well over 1 million persons in a country with a population of 7.3 million will almost halve the ratio of workers to elderly from 3.2 to 1.8. - Population aging is a slow-moving but powerful force, peaking around 2035, and policies should be calibrated well before that peak. - Economic and social effects of aging highlighted: - Shrinking working-age population will lower GDP growth unless offset by increases in the participation rate, immigration, or productivity gains; lower GDP growth would complicate fiscal policies, especially if these accumulate unfunded liabilities. - Expansion of the social services sector, which is characterized by relatively low productivity, could lower overall productivity growth. - Aging populations tend to be risk averse and reluctant to change; voters over 50 will become the majority sooner in Switzerland than in other industrial countries, making reforms more challenging and potentially slowing productivity-enhancing reforms. - Without corrective measures, the finances of the redistributive, pay-as-you-go first pillar will be strained because public spending on pensions, health, and long-term care will increase faster than revenue; strain is exacerbated by the high income elasticity of demand for health care services and above average price increases in this sector. - Risk that retirees from the baby-boom generation running down their assets could depress asset prices, straining funded pension schemes and public guarantee schemes; magnitude of this effect is uncertain. - Some policy responses (for example, raising payroll taxes) could discourage labor supply and lower GDP growth further. - Main quantitative findings: - So far, the impact of aging on the economy has been moderate; the main impact will come after 2015. - Aging is projected to reduce the annual growth rate from around 1½ percent at present to ¾ percent a year in about a decade unless structural reforms boost productivity. - Under current policies, the first pillar is expected to generate persistent primary deficits that would peak at 5 percent of GDP around 2035, raising debt to 250 percent of GDP. - An immediate but permanent fiscal adjustment of 3 percent of GDP would be needed to prevent this imbalance; the adjustment required becomes larger if corrective action is delayed. - The debt brake rule focuses on the current level of federal debt and abstracts from the present value of future deficits in the general government, and thus does not capture the full challenge of aging. ### The demographic outlook for Switzerland in international context - Drivers of demographic developments: increasing longevity, declining fertility, bursts in immigration, and the baby-boom generation. - Life expectancy and fertility: - Life expectancy in Switzerland has increased by 9 years since 1960 and is currently second only to Japan’s. - Fertility rate has declined to 1.5, and is in line with the European Union (EU) average. - Immigration and foreign-born share: - Immigration has been substantial; the share of foreign-born population has risen from 15 to 20 percent (one of the highest among industrial countries). - Key features of the Swiss demographic transition: - The effect of aging on the population pyramid is only now beginning to emerge; the full force of aging is projected to be felt from 2015 onward. - The rapid increase in the number of pensioners relative to the working-age population has been remarkable and is related to the increasing generosity of the social security system and containment of long-term unemployment during the 1990s; since 1990, the number of pensioners increased by 35 percent while persons over 65 increased by 17 percent. - Early retirement has been less prevalent in Switzerland than in other industrial countries. - By 2040, the baby boomers will crowd the top cohorts of the population pyramid and their lagged effect will be visible in the middle of the pyramid. - Population is projected to grow until the mid-2010s and decline by a cumulative 18 percent thereafter until the end of the century. - Working-age population is projected to peak around 2010 and then decline faster and further than total population (working-age population projected to decline by a cumulative 28 percent). - Working-age population, in percent of total population, is projected to recover after 2070, when the lagged effects of the baby-boom generation have dissipated; projections do not show an improvement in the dependency rate until after 2070. - International comparison: - Switzerland’s demographic shift resembles that of most other mature industrial economies; population decline and rise of the dependency rate are on the high side but less pronounced than in Germany and Austria. - Life expectancy is significantly higher than in other countries, although the gap is expected to narrow. - Uncertainty in long-term projections: - Long-term demographic projections are subject to substantial margin of error. - One major uncertainty is public attitude toward immigration in an environment of declining population. - The range between the high and low scenarios of the Swiss Federal Statistical Office (BfS) is for population 2.2 million persons, and, for working-age population, 1.3 million persons. *Source: _cr05188 - References.* ### 9. The World Bank’s projections are more pessimistic than those of the BFS’s. ### 9. The World Bank’s projections are more pessimistic than those of the BFS’s. ### Comparison of population projections - The World Bank projects somewhat larger declines in total and working-age population than the BFS; the time profile of population decline is broadly similar. - The analysis that follows uses BFS’s projections, which are described as of more recent vintage. ### Impact of demographic shift on growth — Baseline scenario: "The Best Years Are Behind" - Potential growth is projected to drop from 1½ percent currently to ¾ percent a year after 2020, mainly as a result of slowing labor input. - Capital deepening and technological progress are assumed to keep annual labor productivity growth just over 1 percent (close to its historic average). - The decline in population and the rise in old-age dependency are projected to reduce total hours worked and shave almost 0.2 percentage point off GDP growth. - Increases in the retirement age provide temporary relief; participation is already high, and immigration is not relied upon to sustain growth given Switzerland’s already large share of foreigners. ### Labor input — components and quantitative assumptions - Labor input is measured in hours = population × share of working-age population × participation rate × employment rate × average hours worked per employed. - Population: - Projected to start declining around 2025. - Total population is projected to decline by a cumulative 2.8 percent between 2005 and 2060, despite a 9 percent increase in immigration. - The share of foreigners will rise from 20 percent to 22.8 percent over this period. - Working-age population: - Share projected to decline from 68 percent to 61 percent between 2005 and 2060. - Participation rate: - Projected to rise further in the near term as women enter the labor force and early retirement dissipates. - After 2010, no further contribution from the participation rate is expected; the labor force will start declining as a result. - Employment and unemployment: - Employment rate projected to increase in the next few years as unemployment declines toward the NAIRU, which is estimated at 2.3 percent. - With unemployment and NAIRU already low, the rise in employment rate is expected to be limited. - Average hours worked: - Declined since 1970; projected small further decline until 2020 and constant hours thereafter. ### Capital accumulation and assumptions - Capital input measured as capital stock (excluding residential structures) × utilization rate. - Assumed constant real investment rate of 18 percent of GDP and depreciation rate of 5 percent (averages over the past 15 years). - Investment rate affects the trajectory (the level) but not the steady-state GDP growth rate; it contributes to easing growth of the capital-labor ratio and drives labor productivity growth to 1 percent. ### Total factor productivity (TFP) - TFP assumed to grow by just under 1 percent a year over the projection period and is the main contributor to long-term GDP growth. - Historical TFP growth estimates: 0.5 percent a year in 1970-81, 0.4 percent in 1982-94, and 0.9 percent in 1995-2004. - Risks to TFP are described as balanced: - Downside: aging, expansion of low-productivity services (especially elderly care), less innovation/flexibility. - Upside: bilateral agreements with the EU, opening of sheltered sectors, delayed productivity response to IT investments, and structural reforms. ### Production function and labor elasticity - Analysis uses a two-factor Cobb-Douglas production function; labor elasticity of output (θ) is set at 70 percent. - This econometric estimate exceeds the national accounts labor share estimate of 58 percent; the gap is attributed to markups (monopolistic conditions) and possible classification of self-employment income. - Relation used: Ŷ = Ĥ + (1/θ) Â, where Ŷ = GDP growth, Ĥ = growth in hours worked, Â = TFP growth. ### Baseline quantitative outcomes and robustness - Baseline scenario specifics: - TFP growth and labor elasticity each equal to 0.7 (i.e., TFP growth 0.7 percent; labor elasticity θ=70 percent). - Labor productivity grows by 1 percent a year. - Population and hours decline by 0.2 percent a year. - Average GDP growth is 0.8 percent over the period 2010–60. - Robustness and alternative scenarios: - Long-run average growth could vary between 0.5 percent and 1.2 percent a year. - Lower bound (0.5 percent) reflects low-population growth scenario; upper bound (1.2 percent) reflects stronger TFP from reforms. - Specific scenario effects: - Increasing retirement age by 3 years (phased in over 12 years) does not change the long-term growth rate but raises the level of GDP by 7 percentage points by 2060 (0.1 percent additional growth a year on average). - Raising the investment rate from 18 to 23 percent: - Raises average growth to 1.0 percent a year (compared with 0.8 percent in the baseline). - Raises the level of GDP by 10 percentage points by 2060. - Raising TFP growth by 0.3 percentage point raises GDP growth by 0.4 percentage point (from 0.8 percent to 1.2 percent), via a magnification factor of (1/θ) and additional capital/labor ratio effects. - Population scenarios: - High population scenario raises average growth in 2010-2060 from 0.8 to 1.1 percent. - Low population scenario reduces average growth to 0.5 percent. - Immigration is assumed to continue until 2020 and raise the share of foreigners from 20 to 23 percent in the baseline. ### Interactions and caveats - Projections abstract from interactions among growth, fiscal position, and policies. - Adverse fiscal developments (e.g., rising public debt leading to credit-rating deterioration and higher interest rates) could reduce investment and growth. - Policy responses to fiscal stress (e.g., higher taxes) could discourage work and capital accumulation and reduce growth. - Such policy–behavior feedbacks require analysis tied to specific policy proposals and are beyond the scope of the paper. ### Impact of demographic shift on public finances — current fiscal situation and pressures - Social security pressures driven by population aging, generosity of pension system, and rising health-care costs. - First pillar pensions (AHV + IV) have been running deficits despite an earmarked VAT increase: - The deficit has more than doubled in percent of GDP since the early 1990s and is projected to reach 2.7 percent of GDP in 2005. - Main reason for deterioration: greater propensity for early retirement and disability pensions; population aging has not yet had a large impact. - Health care: - Public expenditure for health care projected to reach 2.8 percent of GDP in 2005. - Rise in co-payments has tempered fiscal impact; co-payments rose to an effective rate of nearly 13 percent of household expenditure from 7½ percent in the early 1990s. - General government fiscal balances and debt: - To offset social security deficits, general government ran large primary surpluses before transfers to social security: - In 2000–05, the primary surplus before transfers to social security averaged 6 percent of GDP, resulting in an overall primary surplus of 0.6 percent of GDP. - Gross debt at end-2004 was 56 percent of GDP (50 percent in net terms); Switzerland is no longer a low-debt country. - Debt ratio has nearly doubled since the early 1990s due to very low nominal GDP growth leading to unfavorable debt dynamics. - The proceeds from the sale of excess gold reserves transferred to federation and cantons in 2005 could reduce public debt by up to 4.6 percent of GDP (noted as a potential one-off effect). *Italicized source attribution: IMF staff report (content unit: _cr05188 - 9. The World Bank’s projections are more pessimistic than those of the BFS’s.)* ### 26. Under current policies, aging is projected to raise the fiscal deficit and public ### Under current policies, aging is projected to raise the fiscal deficit and public debt to unsustainable levels ### Projected fiscal outcomes and key statistics - By 2040, the social security primary deficit is projected to have deteriorated by 5½ percentage points of GDP from its current level. - Throughout the projection period, only a small part (½ percent of GDP) of the increase in the primary deficit of social security will be offset by the primary surplus in general government. - As a result of the widening overall primary deficits, the public debt ratio is projected to reach 265 percent of GDP and the overall deficit 10 percent of GDP in 2060, even under the technical assumptions of unchanged interest rates and an unimpaired credit rating. - The present value of future primary deficits is equivalent to 170 percent of GDP. - This implicit and yet unfunded liability would be additional to the already existing registered net public debt of 45 percent of GDP (including the proceeds from the gold sale). - The paper assumes that all the gold sale proceed (4.6 percent of GDP) are used to lower debt. ### Baseline assumptions underpinning projections - The nominal interest rate is set at 0.4 percentage point over nominal GDP growth, the average differential in the past 20 years. - The general government runs a structural primary surplus (excluding transfers to the first pillar and health care) of 6 percent of GDP, its level at the base year of the projections adjusted for the effect of ongoing fiscal consolidation measures. - Benefits in the first-pillar pension system grow at half the rate of productivity growth and the incidence of early retirement and disability declines after 2015. - In health care, expenditure on health per insured person (deflated by GDP) grows faster than productivity, reflecting: (i) a unitary income elasticity of health care demand; (ii) health care costs that grow at a faster pace than inflation; and (iii) the increasing share of elderly in the population (evidence from other industrial countries suggests that the health care expenditure of persons in the 75+ and 55-74 age cohort are, respectively, about four and two times higher than the expenditure of persons in the 0-54 cohort). - These health assumptions are considerably more optimistic than the baseline projections on health expenditure presented in the accompanying health care chapter. - Underpinning these assumptions is the assessment that the rapid increase so far reflects the transition to a new, more technologically intensive environment, and the expectation that benefits from the bilateral agreements with the EU and further progress in strengthening competition will temper price increases in the health care sector. ### Size and nature of the required fiscal adjustment - To restore the net debt position to 45 percent of GDP by 2060, the general government would need to raise permanently as from 2007 its primary surplus to 4⅓ percent of GDP. - This would imply an overall surplus of the general government of 1.7 percent of GDP on average in 2007–20. - Policy instruments that would be equivalent to this permanent adjustment include (each presented as equivalent to the required adjustment): - raising the basic VAT rate by 5½ percentage points to 13 percent; - increasing income tax revenue by 35 percent; - cutting consolidated government expenditure by 9½ percent across the board; - raising contribution rates by 6⅓ percentage points. - Other measures—raising the effective retirement age, reducing the indexation of pensions, and better linking pension benefits to lifetime earnings—would reduce the magnitude of the required fiscal adjustment. ### Timing and delay effects - Delaying the adjustment by ten years would require the adjustment in the primary balance to be raised by 0.9 percentage point of GDP to offset additional debt accumulated during the delay. - Correspondingly, the VAT rate that would restore fiscal sustainability under a ten-year delay would need to rise to 14.2 percent (1.2 percentage points higher than in the immediate-adjustment scenario). - There is a limit to the trade-off between timing and size of adjustment: fiscal adjustment should take place before debt reaches a level that starts making financial markets uncomfortable. ### Role and limits of the debt-brake rule - Stabilizing the debt ratio at its present level requires the general government (excluding social security) to run growing primary surpluses to offset the growing operating deficit of social security: by 2035, the primary surplus would need to rise by 6 percent of GDP above its current level. - The debt-brake rule is helpful, but even if applied at the level of the general government it would not prevent a painful adjustment. ### Robustness and sensitivity of the baseline scenario - Public debt: Contingent liabilities related to guarantees for certain pension funds could add 5-10 percentage points to the debt ratio; privatization revenue could offset some additional liabilities. - Discount factor: Forecasting the differential between the interest rate and nominal growth 50 years hence is uncertain. In the baseline scenario, raising the differential between the interest rate and nominal GDP growth from 0.4 to 1 percent over the projection period (but keeping the path of output growth unchanged), reduces the required (instantaneous) increase in the primary surplus from 3.7 to 3.9 percent of GDP. It also raises eventually the deficit and the public debt would exceed 10 and 300 percent of GDP, respectively. - Pensions: Calculations are sensitive to the incidence of early retirement and indexation rules. Critical aspects include the ratio of the average pension to the average productivity of labor and the indexation rule. - Health care: Scenarios are sensitive to the income elasticity of demand and the differential between health care and overall inflation. The companion paper on health care (Chapter II) projects that, on the basis of unchanged policies and past trends, public subsidies could grow by 8 percentage points of GDP through 2050. - Primary structural surplus: If the primary surplus turns out to be lower than the baseline estimate of 0.4 percent of GDP, the size of the fiscal adjustment would need to be raised accordingly. - Underfunding in the second pillar, especially in defined-benefit plans, could burden public finances via explicit and implicit public guarantees to the second pillar and demands on the social safety net. ### Policy options and recommendations - Overall strategy: A viable solution will probably require a combination of benefits rationalization, structural reforms to boost growth, and fiscal adjustment. - Benefits rationalization (first pillar): - Remove incentives for early retirement and create incentives to work longer. - Align the statutory retirement age with rising life expectancy. - Reduce the replacement rate and reduce the weight of wages in the pension indexation formula and/or lower the frequency of pension adjustment (currently, every two years). - Means-test benefits and strengthen the social safety net for low-income pensioners. - Phase changes in statutory retirement age gradually and accompany with actuarially fair adjustments for early or late retirement. - Role of pillars: Reassess the role of the pay-as-you-go first pillar relative to the fully funded second pillar: consider whether the first pillar should meet only basic needs and whether private saving and rates of return can deliver expected replacement incomes. - Health care cost containment: - Harden budget constraints (for instance, make investment in new facilities conditional on availability of local financing). - Consolidate and use health care infrastructure more efficiently and reduce fragmentation. - Increase co-payments where appropriate. - Increase competition in health care services and liberalize imports of pharmaceuticals and generics. - Structural reforms to raise productivity and employment growth: These would ease the burden of fiscal adjustment, provided pension benefits are not fully indexed to productivity gains. A structural reform agenda was launched in 2004 (SECO, 2004). Immigration can boost output growth and strengthen first-pillar finances but integration costs are non-negligible. - Fiscal adjustment emphasis: Tilt adjustment toward expenditure containment; scope to raise income taxes is limited by tax competition and higher payroll taxes could lower growth. Moderate increases in VAT revenue might be employed. The authorities recently proposed a phased rise in the VAT rate of a cumulative 2.5 percentage points, but this was rejected in a referendum. - Fiscal framework reforms: - Strengthen cooperation between levels of government; current sharing of first-pillar financing between federal and cantonal governments diffuses responsibility. - Supplement the three-year rolling federal financial plan with a long-term fiscal sustainability plan for general government that captures aging effects. - Prepare a comprehensive periodic report on the financial position of social security with a horizon sufficient to capture aging effects (effects peak around 2040). ### Concluding assessment - Unless policies are changed, population aging in Switzerland is expected to hamper growth and generate fiscal pressures over the longer-term. - Delays in addressing the problem would make the solution more difficult in the future; phasing in fiscal adjustment reflects social time preferences, views on intergenerational equity, and political economy considerations. *IMF staff analysis in the referenced chapter.* ### 42. The fiscal policy framework needs fine-tuning. A forward-looking target path for ### 42. The fiscal policy framework needs fine-tuning. A forward-looking target path for public debt and improved coordination of fiscal policies among the various levels of government are needed to ensure the intertemporal consistency of fiscal policy. ### Fiscal policy framework: key finding - The fiscal policy framework needs fine-tuning to ensure intertemporal consistency of fiscal policy through: - A forward-looking target path for public debt. - Improved coordination of fiscal policies among the various levels of government. ### Appendix I. The Framework for Long-Term Growth Projections — model structure and steady state relations - Production function (notation preserved): - Yt = At · (ut · Ct)1-θ · Htθ = (ut · Ct)1-θ (Bt · Ht)θ - Total factor productivity: - At = (1+ Â ) · At-1 - Capital accumulation: - Ct = (1-δ) · Ct-1 + i · Yt-1 - Hours worked: - Ht = Lt · ht - Hours per employed: - ht = hft · (1- πt) + hpt · πt - Employment: - Lt = (Population)t · (activity rate)t · (participation rate)t · (1-URt) - Definitions and parameter notes: - Circumflex ^ denotes percent change. - Y = real GDP. - A = total factor productivity, which grows at a constant rate Â. - B = Harrod neutral technical progress, related to total factor productivity by At = B t θ. - u = capacity utilization; constant after completion of current cycle. - C = capital stock. - H = total hours worked. - hf, hp = hours worked per full-time and per part-time employee. - π = share of part-time employment. - L = employment. - UR = unemployment rate; set equal to the NAIRU after completion of the cycle. - Decomposition of GDP growth: - Ŷ = [ Â + (1-θ)(capital deepening)] + ĥ + (population growth) + (aging) + (participation growth) – (unemployment decline) - Bracketed term = average productivity growth. - Steady state relations: - Output growth = sum of growth in labor productivity and hours worked: Ŷ = (1/θ) Â + Ĥ. - Output-capital ratio unchanged: Ŷ = Ĉ. - Capital-labor ratio in efficiency units constant: Ct/(Bt · Ht) constant. - Capital-labor ratio in physical units increases at rate: Ĉ – Ĥ = (1/θ) Â. - Labor productivity per hour: Ŷ – Ĥ = Â + (1-θ)(Ĉ – Ĥ) = (1/θ) Â. ### Appendix II. Fiscal Sustainability: theoretical considerations and metrics - Public expenditure categories (analytic division): - Public pension payments and medical benefits: St. - All other expenditure excluding interest: Gt. - Interest on public debt: Rt · Dt-1 (Dt = end-of-period net debt; Rt = nominal interest rate). - Net public debt used (gross debt minus social security assets); note on assets: - Aggregation into net debt may be non-innocuous when returns differ; assets ≈ 10 percent of net debt in the context discussed. - Relation between interest rates: RN = RD + (RD - RA) · A / (D - A). - One-period government budget constraint and debt dynamics: - Dt = (1+Rt) · Dt-1 + (Gt + St – Tt – NTt) - In ratios to GDP (lowercase): dt = (1+ζt)· dt-1 + (gt + st – τt – nτt), where (1+ζt) = (1+Rt)·(1+ηt)-1 and ηt = growth rate of nominal GDP. - Assuming ζt constant, recursive solution: - (1+ζ)-n · dn = d0 + Σ1^(n-1) (1+ζ)-j (gj + sj – τj – nτj) = d0 + PV. - Additivity and decomposition of PV (present value of primary deficits): - (1+ζ)-n · dn − d0 = PVG + PVA + PVI + PVK (general government primary balance and social security components: old age and survivor pensions (A), disability insurance (I), sickness insurance (K)). - Aging decomposition: - PV = PV(B) + PV(V) where PV(B) = present value of primary balances absent further population aging, PV(V) = impact of impending population aging. - (1+ζ)-n · dn − d0 = PV(B) + PVA(V) + PVI(V) + PVK(V). - Definition of sustainability (Blanchard, 1990): - Fiscal policy sustainable if current policies can continue without raising debt-to-GDP to levels markets will not finance at prevailing interest rates. - In partial equilibrium, critical debt set equal to current level as first approximation. - Measure of fiscal imbalance: [(1+ζ)-n · dn − d0]. - Alternative metrics and caveats: - Metric can be expressed as required revenue/expenditure adjustments or specific measures (e.g., raise contribution rates, cut pensions). - Sustainability definition may be strengthened by debt/GDP ceiling constraints or generational affordability/equity criteria. - Present value metric sensitive to discount factor ζ: if future balances are deficits, PV decreases in ζ; a low PV may coexist with problematic future debt paths. - Supplementary indicator: number of years until debt reaches a critical threshold triggering rating downgrades. ### Appendix III. Framework for Old Age and Disability Pension Projections — expenditure and revenue drivers - Pension expenditure modeling (percent of GDP formulation, variables preserved): - E = a · I / (p · Y) = (a · p-1 · y-1) · i · ξ - Where: - a = average nominal pension, including administrative costs; based on lifetime earnings, subject to a ceiling (2004: SwF 2110 per month for individual pensioner); replacement rate for average income earner = 45 percent. - i = I / PO = pensioners in percent of the elderly (depends on coverage and early retirement); boosted by pensioners living outside Switzerland. - ξ = PO / E = old-age dependency = (PO/POP) · (POP/POPT) · (POPT/LF) · (1+UR). - y = Y/E = average labor productivity. - Change of primary pension expenditure relative to base: - Et = E0 · [(at / a0) · (pt / p0)-1 · (yt / y0)-1] · (it / i0) · (ξt / ξ0) - Drivers of pension expenditure increases: - (i) Average pension rising faster than inflation plus labor productivity. - (ii) Share of pensioners in elderly rises. - (iii) Old-age dependency rises. - Historical rates (annual average rate of change, 1980-2003): - Old age and survivor pensions: 2.7 percent - Disability pensions: 2.6 percent - GDP deflator: 2.3 - Labor productivity: 0.4 - Observations: - Average pensions increased at annual rate of 2.7 percent, roughly matching GDP deflator plus labor productivity, leaving bracketed term roughly unchanged. - Evolution of expenditure driven by rise in old-age dependence (ξ) and early retirement (i). - Higher immigration reduces pension expenditure percent of GDP by reducing ξ. - Increase in effective retirement age reduces pension expenditure by raising participation rate. - Pension revenues (contributions and earmarked VAT): - R = c · W · B / (p · Y) + v · h = c · (B/E) · (W / p) / y + v · h - Where W = average nominal wage; B = persons contributing (includes Swiss working abroad); v = earmarked VAT rate; h = VAT incidence. - Revenue dynamics: - If real wages rise in line with labor productivity and ratio contributors/employment constant, revenue dynamics driven by contribution and earmarked VAT rates. - Increase in effective retirement age or immigration raises revenue in absolute terms but not percent of GDP. - In absence of measures, evolution of first pillar primary balance driven exclusively by expenditure. - Projections reference: - Projected increases in deficits of old age and disability pensions, evolution of number of pensioners, and ratio of benefits vis-à-vis productivity growth given in Figure I-6 (figures and series noted in source). ### Appendix IV. Framework for Health Care Projections — expenditure, revenue, and financing gap drivers - Health expenditure model (percent of GDP formulation): - E = h · (I / POP) · (POP/E) / (p · y) = (h / p) · i · e-1 · y-1 = (h p-1 y-1) · i · e-1 - Where: - h = average health care expenditure per insured person (depends on health sector inflation, generosity of system, average age of insured; expenditure rises rapidly over age 50 and is four times for octogenarians vs. under 50). - i = insured individuals in percent of population. - e = employment as percent of population = activity rate · participation rate · (1 - unemployment rate). - Evolution relative to base period: - Et = E0 [(ht / h0) (pt / p0)-1 (yt / y0)-1] (it / i0) (et / e0)-1 - Primary revenue model: - R = c · (I / POP) · (POP/E) / (p · y) = (c / p) · i · e-1 · y-1 = (c p-1 y-1) · i · e-1 - c = contribution rate (includes co-payments). - Operating balance and evolution: - E – R = [(c – h) p-1 y-1] · i · e-1 - (Et – Rt) = (E0 – R0) [(ct – ht)/(c0 – h0)] (pt / p0)-1 (yt / y0)-1 (it / i0) (et / e0)-1 - Main drivers of health deficit evolution: - Shortfall of the contribution rate from per capita expenditure (c – h). - Employment rate e. - Projection assumptions: - Contribution rate and government subsidy (in percent of GDP) remain unchanged at present levels. - Projections reference: - Evolution of deficit and demographic/sectoral series shown in Figure I-7 (figures and series noted in source). ### Appendix V. Data sources and key parameter values used in projections - Population and working-age population: - OECD Analytical Data Base (ADB) until 2000. - From 2001 onwards, growth rates set equal to those in BfS’ baseline scenario. - Labor force and employment: - Labor force = employment + registered unemployment. - Employment figures up to 2003 from ADB; 2004 estimate based on BfS employment statistics. - From 2005 onward, employment linked to GDP assuming labor productivity grows at an average rate of 1.1 percent per year. - Registered unemployment series from ADB. - Unemployment projected to decline to the NAIRU (2.3 percent) by 2010. - Hours worked: - Data since 1991 from Federal Statistical Office (BfS); series backcasted using product of work-weeks and contractual hours. - In 1991-2002, full-timers worked 2.5 times more hours than part-timers; this ratio used to link earlier years. - Part-time share: - Derived from hours statistics. - Capital stock: - Computed from investment at constant prices (excluding residential construction), starting value from Lüscher and Ruoss (1996) 1968 estimate; exponential depreciation applied. - Depreciation based on expected lives: 50 years for structures, 15 years for machinery and equipment, 4 years for software. - Average depreciation rate rose from 4 percent in early 1970s to 5 percent in early 2000s. - Capacity utilization: - Obtained from KOF data bank; pre-1999 values reduced by 3 percentage points due to a break in series. *Italic: IMF staff summary of content unit _cr05188 - 42. The fiscal policy framework needs fine-tuning.* ### 65. Switzerland’s health care system ### 65. Switzerland’s health care system ### A. Overview and performance - Switzerland’s life expectancy is 80½ years, second in the world to Japan; infant mortality is twice as high as in the best performing countries. - The Swiss population pays a high price for high-quality services; cost increases have resisted several attempts at reform—including in 1996—and are turning into a fiscal problem. - Switzerland spends 11.5 percent of GDP on health care, second-highest in the world after the United States at 14.6 percent. - The health share rose from 5.4 percent of GDP in 1970 to 11.5 percent, the steepest increase in the OECD. - Median values for 1970-2002 (OECD average in brackets): - Total health care spending: Distribution 100 (100); Real per-capita growth 3.1 (3.6) - Hospitals: Distribution 47 (47); Real per-capita growth 3.1 (3.1) - Doctors, nurses: Distribution 33 (33); Real per-capita growth 3.1 (3.7) - Medical goods: Distribution 13 (14); Real per-capita growth 2.1 (3.8) - Collective health care: Distribution 7 (6); Real per-capita growth 4.4 (2.7) - Real per-capita health care spending grew below the OECD average; disaggregated spending items aligned with OECD averages. The high health-to-GDP ratio reflects slow GDP growth (the denominator effect) rather than extraordinary quantities of care. ### B. High prices and identified supply-side distortions - Core finding: Swiss health care is expensive mainly because of high prices rather than large quantities; volume grew less than the OECD average, while relative prices grew faster. - Four supply-side problems identified: 1. Regional fragmentation - The Constitution assigns provision of health care to cantons, producing a proliferation of hospitals as most cantons strive to provide the full spectrum of services. - Switzerland has the third-highest number of hospitals per capita in the OECD; many are small and not very specialized. - Operating costs of public and subsidized hospitals are fully reimbursed by compulsory sickness insurance and cantons, removing incentives for cost control. - Switzerland has the third-highest number of physicians per capita in the OECD; regional regulations and licensing concentrate physicians in cities and inhibit national competition. - Insurers must cover treatment by every doctor, even the most expensive ones, complicating cost control. 2. Financial fragmentation - Three institutions finance health care: private health insurers (KV), public accident insurance (UV), and disability insurance (IV). - Blurred lines between schemes allow providers to shift patients between schemes; disability insurance has grown rapidly and shows indications of use for early retirement, pooling risks in a generous public plan. 3. Supply-induced demand - Information asymmetries concentrate market power on providers; patients often cannot assess quality and price in advance or negotiate. - Switzerland shows strong evidence of supply-induced cost inflation: third-highest number of nurses and MIR and CT equipment per capita in the OECD, and the second-longest hospital stays. - A documented correlation exists between cost and physician density; cantons with higher physician density have higher health care cost per capita. 4. Insufficient competition in pharmaceuticals - Elevated drug prices due to past cartel activity (Sanphar), which was declared illegal in 2000 but continues to exist; no evidence of a relative decline in drug prices in the CPI. - Parallel imports of drugs remain illegal. - High domestic prices have supported R&D and the emergence of strong multinational pharmaceutical companies; Switzerland functions as a high-price testing ground. ### C. Financing structure and equity implications - Three basic system types (following Oggier, 2004): National health services (tax-financed), Social security (payroll tax–financed), Insurance systems (premia-financed). The US and Switzerland are predominantly insurance systems. - Switzerland’s financing profile: - Three quarters of health care costs financed by the private sector. - About 40 percent of private health care costs are covered by health insurers; 34 percent paid out-of-pocket (co-payments). - Switzerland has the highest percentage of private co-payments in the OECD; OECD average co-payments are 13 percent. - The state covers the remaining 26 percent of health care costs. - Equity concerns: - Average private health care bill was more than SwF 5,000 per individual in 2002. - Insurance premia and out-of-pocket payments are regressive and unrelated to income; most affected are dependent individuals outside the labor force (children, housewives, some elderly). - Subsidies for the poor: - Subsidy is income-related and ensures insurance premia currently do not exceed about 13 percent of household income. - Regional disparities: insurance premia ranged from a minimum of SwF 2,300 per year in Nidwalden to a maximum of SwF 4,800 per year in Geneva (2004). - 33 percent of Swiss households received subsidies in 2004; regional values ranged from 23 percent in Aargau to 60 percent in Appenzell Innerrhoden. - The Confederation contributes the lion’s share; cantons can top up and control distribution; for budgetary reasons cantons sometimes do not disburse all allocated funds. - Subsidies minimize labor-market distortions compared with payroll or income taxes, but they avoid distortions only as long as their volume does not become too large. ### D. Fiscal burdens and simulation scenarios - Trend concern: continued growth of health expenditures relative to income could force more households onto subsidies or expand public financing, worsening fiscal balances. - Recent simulations suggest additional expenditures could amount to 8 percentage points of GDP by 2050. - General-equilibrium growth model assumptions (coming 40 years): - Quantity and price parameters evolve as in the past decade. - Quantity of health care assumed to have an income elasticity of 2. - Health care prices assumed to increase a quarter percentage point faster each year than the GDP deflator. - Additional cost pressures modeled based on rising old-age dependency ratio, mainly in 2010-35. - Distributional and subsidy projections: - Without higher subsidies, income inequality would increase: simulated Gini coefficient rising from 28.5 to 33.5. - To keep private health spending threshold at 13 percent of household income, subsidies would need to cover excess costs for qualifying brackets. - Model suggests share of subsidy recipients rising to 41 percent of households in 2008, and to over 60 percent in 2015; by 2050 around 90 percent of the population would depend on government subsidies. - Fiscal cost projections: - Subsidies would rise from 3 to 4 percent of GDP during the present decade, accelerating after 2010 with aging. - By 2050, fiscal spending on health care would be more than 8 percentage points of GDP higher than today. - Macroeconomic impact of tax financing: - Tax increases of up to 8 percentage points of GDP (to finance subsidies) would slow GDP growth, especially if affecting payrolls. - Preliminary simulations: slowdown in annual GDP growth could reach more than 0.3 percentage points per year, lowering the level of Switzerland’s real GDP by a cumulative 7 percentage points by 2050 compared with a scenario without these tax increases. ### E. Conclusions and policy implications - Core conclusion: Switzerland spends a high share of GDP on health care, and current spending dynamics are incompatible with slow growth; health care could evolve into a significant fiscal problem unless market distortions are addressed. - Policy directions emphasized: - Promote economies of scale and reduce regional fragmentation of health care infrastructure; more centralized coordination tends to lower average cost. - Overcome lack of coordination between cantons and strengthen Confederation regulatory powers to facilitate cost controls. - Reduce degrees of freedom for providers and limit automatic reimbursement that inflates supply of medical services. - Reform financing schemes to reduce incentives to accumulate higher risks in public-sector insurance plans (e.g., disability insurance). - Foster a more competitive pharmaceutical market and liberalize drug imports to lower drug prices. - The literature stresses the importance of increased government cooperation at all levels to implement reforms. *Prepared by Benedikt Braumann. Source: _cr05188 - 65. Switzerland’s health care system (IMF).* ### 86. The number of referenda has ### _cr05188 - 86. The number of referenda has ### Direct democracy and referenda - The number of referenda increased from "10 or 20 per decade" in the early 20th century to "currently around 140 per decade". - Including cantonal and local referenda, the number "easily doubles". - Voter turnout is "usually less than 50 percent" and "has remained stable since the 1960s" despite the sharp increase in frequency. - Interpretation: stable turnout "suggest[s] that voters in Switzerland are dedicated and well-informed." ### Federal structure and subnational autonomy - Cantonal autonomy is historically strong due to past linguistic and religious tensions; it remains important even after tensions subsided. - The federal government accounts for "less than a third of public spending". - Federal responsibilities: "foreign policy, defense, pensions, post, telecommunications, railways, and the currency." - Cantonal responsibilities: "economic regulation, education, health care, and most judiciary functions." - Communes (within cantons) "enjoy a high degree of independence, in particular in fiscal policy." - Political consequence: wide autonomy contributes to slow legislation because of extensive consultation, weak party discipline, and the possibility of rejection via referendum; once approved, implementation is "quite rapid and efficient." ### Political variables: majority, ideology, and polarization - Government parliamentary majority: - Four largest parties rule in coalition; the combined federal-and-cantonal government majority "usually fluctuates around 85 percent of the seats", declining to "76 percent" during the mid-1990s downturn. - Ideological indexing: - Parties arranged on a 1-to-7 left-right scale; values weighted by seats at federal and cantonal levels. - The average political position (1970–2004) "shows no trend" though cyclical swings occur roughly every seven years. - Specific swings: electorate tended more to the right in "the early-1970s, the early-1980s and toward 2000", and more to the left in "the late 1970s, late 1980s and in recent years." - Multimodality and party fragmentation: - Political distribution is "multi-modal" with "three distinct frequencies" and a weak center. - The two largest parties (SVP and SP) have "fairly contrasting programs." - Increasing polarization: - The variance (standard deviation) of the left-right index increased in a stepwise fashion over 1970–2004. - Consequence: "extreme positions make compromise more difficult, and encourage disruptive referenda." - Government tensions: - Based on voting recommendations of the four government parties ("no" = 0, "yes" = 1, "without recommendation" = 0.5) across 325 referenda (1970–2004). - The standard deviation of these recommendations rose after a lull in the mid-1990s, indicating increased internal tensions. - Polarization and the business cycle: - Polarization is "procyclical": economic upturns associated with increased polarization; recessions favor moderation and unity. - Granger causality (Sample: 1970-2004): - Null: "Change in Polarization" does not cause "Output Gap" — F-Statistic "2.78", Probability "0.0795". - Null: "Output Gap" does not cause "Change in Polarization" — F-Statistic "13.19", Probability "0.0001". ### Fiscal adjustment and political economy - Fiscal policy is procyclical: fiscal adjustment "mostly occurred during recessions." - Fiscal impulse and output gap are "highly correlated." - Structural balance deterioration arises mainly "through a loss of expenditure control." - Empirical regression (Table III-2; Sample: 1970-2004; Adj. R2: "0.60") — Dependent variable: Fiscal impulse - Output gap: Coefficient "0.21", t-Statistic "3.28" - Unemployment rate (t-1): Coefficient "-0.38", t-Statistic "3.79" - Ideology: Coefficient "-2.86", t-Statistic "3.25" - Majority: Coefficient "4.65", t-Statistic "1.74" - Polarization: Coefficient "4.70", t-Statistic "3.83" - Interpretation of coefficients: - A shift in the political climate to the right ("Ideology" negative coefficient) "seems to favor fiscal adjustment." - Government majority is "insignificant" (t-Statistic "1.74"), possibly due to offsetting ideological positions. - Increasing polarization "has the expected negative effect on fiscal adjustment" by making expenditure control more difficult. ### Structural reforms: timing, drivers, and constraints - Structural reform indicator (1970–2004) constructed from "162 referenda and 17 unchallenged laws"; reforms signed positive when they "reduced economic distortions or government regulations"; classified from "1 (least significant) to 3 (most significant)"; averaged over a rolling five-year period. - Time-series pattern: mid-1990s long recession "facilitated reforms" (Figure III-11 shows positive values indicating faster and deeper reform). - Mid-1990s reforms included: "pension and unemployment benefits, competition law and antitrust, the privatization of telecoms and airports, bilateral treaties with the EU, and the introduction of a VAT." - VAT case study: - Two failed attempts in "1977 and 1979" when growth was "around 2 ½ percent" and unemployment low. - Successful introduction in "1993" during recession, high unemployment, and soaring fiscal deficit; voters approved a rate increase. - A later proposed rate increase "fell victim to economic recovery" in 2004. - Regression on reform indicator (Table III-3; Sample: 1970-2004; Adj. R2: "0.76") — Dependent variable: Indicator of reform - Constant: "78.30", t-Statistic "3.61" - Output gap: Coefficient "-0.12", t-Statistic "0.42" - Unemployment rate: Coefficient "2.14", t-Statistic "4.19" - Ideology: Coefficient "-4.13", t-Statistic "0.76" - Majority: Coefficient "-45.51", t-Statistic "4.69" - Polarization: Coefficient "-15.34", t-Statistic "2.50" - Interpretation: - Unemployment increases "the pressure for structural reform." - Ideology is not significant for reform incidence, reflecting cross-party reform involvement. - A large government majority and political polarization "detract from reforms." - The mid-1990s low government majority was partly due to protest votes forcing action; later absorption of protest votes by SVP and SP reduced government pressure to reform and increased internal tensions. ### Conclusion and policy-relevant outcomes - The Swiss direct-democracy, consensus-based system can adopt significant and rapid reforms "under economic pressure when the political climate favors compromise" (exemplified by the mid-1990s). - Once enacted, reforms are "not easily reversed" due to the consensus system. - Current combination of "economic expansion, political polarization, and internal stress in federal and cantonal governments" makes fiscal adjustment and economic reform difficult. - The constitutional "debt brake" is an institutional reform aimed at breaking procyclical fiscal patterns by stressing structural rather than actual balances. - In its "three years of operation", the debt brake "has upheld fiscal discipline" and for the first time, "fiscal adjustment is taking place during an upturn." *Italic: Content summarized from the provided IMF chapter section.* ### 11. revision of first-pillar pensions ### 11. revision of first-pillar pensions ### Referenda and initiatives related to first-pillar pensions (selected entries) - Jun-95 — Expanding 1st pillar pension, reducing 2nd pillar pension — I40.327.6123 - Jun-95 — 10th reform of 1st pillar pension, same retirement age for men and women — F40.460.731123 - Feb-78 — 9th reform of first-pillar pensions AHV — F48.365.62185 - Dec-72 — Pension reform (gov. proposal) — G52.974.0190 - Dec-72 — Pension reform (communist initiative) — I52.915.690 - Nov-00 — No pension to working old — I41.746.0152 - Nov-00 — Yes pension to working old — I41.739.5152 Type/Direction legend (as presented in the source): - O = compulsory referendum (obligatorisches Referendum) - F = non-compulsory referendum (fakultatives Referendum) - I = people's initiative (Volksinitiative) - G = government counter-proposal (Gegenentwurf) - L = unchallenged law - Direction: 1 = decrease in taxations, regulation, distortion; -1 = increase in taxation, regulation, distortion ### Key statistics and observations from the referenda appendix - The appendix lists Swiss referenda with economic content from 1970-2004, including multiple entries affecting the first-pillar (AHV) pension system across decades (e.g., 1978, 1972, 1995). - Entries are recorded with Date, Subject, Type, Participation, Rate of Approval, Scope, Direction (codes preserved in listed identifiers). ### Policy-relevant implications (from the pattern of referenda) - Multiple reforms and initiatives over time indicate persistent public and political engagement with first-pillar pension design and retirement-age parity (men and women). - Government proposals and people's initiatives have both featured, sometimes concurrently (e.g., Dec-72 government proposal and communist initiative on pension reform). --- ### Characteristics of the Swiss financial system in international comparison ### Size, structure, and economic importance - Assets of banks and investment funds, and assets under management and custody in banks total around 15 times the Swiss GDP. - Value added in the financial services sector (banking and insurance) amounts to 13.6 percent of GDP. - The sector employs more than 190,000 people (4.5 percent of total employment in the economy). - Swiss banks manage around one third of all private assets invested across borders. - Some 83 percent of the assets under management and 56 percent of assets held in custody belong to foreign investors. - Virtually all assets under management are invested outside Switzerland. ### Market structure and concentration - The banking sector is highly concentrated: charts indicate the share of 5 largest banks in sector assets (examples include 89, 84, 83, 47, 44, 44, 33, 32, 27, 22, 22, 19 percent for various countries with Switzerland among them as shown). - Number of banks fell by 17 percent between 1990 and 2004. - The Swiss insurance sector is less concentrated; major players include SwissRe and Swiss Life. ### Income composition and sensitivity - Banks obtain a large share of income from fees and commissions, making performance more dependent on asset prices (especially equity). - Fee-related figures (by country ranking in source charts): fees and commissions as percent of gross income include 34.6, 33.3, 31.2, 29.3, 28.8, 28.5, 27.1, 25.7, 23.4, 15.9, 42.7 (with Switzerland among the highest at 34.6 percent in the chart). - Net interest income as percent of gross income shown in chart: values include 65.8, 64.4, 57, 56.4, 54.7, 54.5, 51.2, 50, 41.2, 36.9, 70.2 (Switzerland’s share is relatively low in that chart). ### Prudential metrics and risk profile - Regulatory capital as percent of risk-weighted assets (Banks): 12.1, 11.2, 11.0 (2002, 2003, 2004 respectively). - Regulatory Tier I capital to risk-weighted assets: 12.6, 12.2, 11.6 (2002–2004). - Non-performing loans net of provisions as percent of tier I capital: 23.3, 16.5, 12.1 (2002–2004). - Non-performing loans as percent of gross loans: 3.1, 2.3, 1.6 (2002–2004). - Gross profits as percent of average assets (ROAA): 1.1, 0.9, 0.9 (2002–2004). - Gross profits as percent of average equity capital (ROAE): 18.3, 16.0, 16.7 (2002–2004). - Liquid assets as percent of total assets: 21.6, 21.6, 27.0 (2002–2004). - Liquid assets as percent of short-term liabilities: 47.9, 52.9, 54.9 (2002–2004). ### Banking sector distribution and balance-sheet features - Capital as percent of assets (simple ratio): 5.4, 5.2, 5.0 (2002–2004). - Geographical distribution of bank credit as percent of total foreign credit: Switzerland 65.1, 68.0, 64.6 (2002–2004). - Customer deposits as percent of total (non-interbank) loans: 98.4, 104.8, 105.0 (2002–2004). - Foreign currency loans as percent of total loans: 31.6, 31.6, 31.6 (2002–2004). - Foreign currency liabilities as percent of total liabilities: 55.1, 54.8, 57.8 (2002–2004). ### Insurance and pension-sector metrics - Assets of insurance companies at SwF 530 billion, equal to 122 percent of GDP in 2003. - Premiums collected in 2003 totaled SwF 51.6 billion; life insurers collected 62 percent. - Annual premium volume of SwF 7,000 per capita (private direct insurance only). - International business importance: 70 percent of group premiums are generated abroad; 95 percent of the turnover of reinsurance companies is abroad. - Pension funds: under-funding as percent of total liabilities 22.6, 19.6, ... (2002–2004) — share of underfunded funds (as percent of all pension funds) 19.8, 11.9, ... ### Household and real estate indicators - Household debt as a percentage of GDP: 85.7, 88.5, 90.1 (2002–2004). - Annual percent increase of real estate prices: 2.8, 2.3, 2.3 (2002–2004). - Mortgage loans as percent of total loans: 69.9, 71.5, 69.7 (2002–2004). ### Operational and reputational considerations - Swiss banks are vulnerable to operational and reputation risk due to their service profile. - Swiss banks are subject to stricter prudential requirements than those proposed under the Basle II accords to protect operational and reputational integrity. *Source: _cr05188 - 11. revision of first-pillar pensions (IMF staff chapter content).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05188.pdf_