Switzerland: Proposed VAT rate increase, to fund Swiss pension system

Swiss voters will have to vote and decide on all the changes concerning the Swiss pension system.

Voters will have to vote and decide on all the changes concerning the Swiss pension system

The National Council and the Council of States in December 2021 voted in favor of an increase to the value added tax (VAT) rate, as part of the reform of the Swiss pension system (the so-called “AHV 21” / “AVS 21”).

Overview

The financing of the “old age and survivors' insurance” has been deteriorating since 2014, and funds paid into the Swiss old age insurance are no longer sufficient to finance current annuities. However, the pay-as-you-go system requires a balance between revenues and expenditures. The situation is expected to get worse with “baby boomers” retiring beginning 2020. The accumulated pay-as-you-go deficit between 2022 and 2030 is expected to be equivalent to 39 billion Swiss francs, with the financing requirement to cover 100% of the equalization fund amounting to 53 billion Swiss francs.

In the past, several attempts have been made to reform the Swiss pension system, but no measures were implemented. The Swiss Parliament is now considering drafts of adjustments to the law (AHV 21 / AVS 21) that cover the most essential points to stabilize the Swiss pension system.

Among the proposed measures are reforms that would provide:

  • Standardized retirement age of 65 for both men and women
  • Compensatory measures for the transitional generation
  • More flexible option on the retirement age 
  • Incentives for continuing to work after the age of 65

According to the Swiss Parliament, the above measures alone would not cover the full deficit calculated for the period between 2022–2030. Therefore an increase of the VAT rates may be necessary to help cover the open deficit. The following table outlines these proposed rate increases.

 VAT rates

As of 1 January 2021

Adjustment

Adjusted rates

Standard rate

7.7%

+ 0.4%

8.1%

Reduced rate

2.5%

+ 0.1%

2.6%

Special rate for accommodation

3.7%

+ 0.1%

3.8%

What’s next?

As the VAT rates are fixed by the Federal Constitution, the increase of the VAT rates is subject to a mandatory voter referendum. Since all the measures are interlinked, they will only become effective if all measures are approved—e.g., this means the retirement age for women will only be set at 65 if the VAT rate will be increased, and vice versa.

Swiss voters will have to vote and decide on all the changes concerning the Swiss pension system and the increase of the VAT rates. 

The referendum deadline is 7 April 2022, with the vote happening within one year after this deadline. The potential increase of the VAT rates would be implemented in 2023 at the earliest.

Read a January 2022 report prepared by the KPMG member firm in Switzerland

 

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