The following OECD assessment and recommendations summarise Chapter 3 of the Economic Survey of Switzerland 2006 published on 6 January 2006.
How can the old-age and disability pension schemes be made sustainable?
A better fiscal policy framework is, however, no substitute for wide-ranging reforms in the old age, disability and health insurance systems, which are three key areas underlying the sharp rise in public spending. Because of population ageing, a deficit in the basic old age system (AVS) will emerge between 2007 and 2010, reaching around 1½ per cent of GDP by 2020 and probably more than 3% of GDP by 2040. After the overhaul of the AVS was rejected by a referendum in 2004, deep reforms were put off until 2008 or 2009. Lowering benefit levels, an extension of years of work – which is not incompatible with making the retirement age more flexible – and recourse to additional funding cannot be avoided. Linking years of work at least partly to life expectancy would limit the extent to which replacement rates need to be cut while at the same time ensuring that the burden of adjustment is shared equitably between generations. It is important not to delay enacting reforms so as to allow enough time for the insured to adjust. A late decision could also pose problems of fairness if the ageing-related rise in the average age of the electorate would marginalise younger generations in the democratic decision-making process.
Reforms of social programmes are required urgently to slow government spending
In per cent of GDP
1. 2002 for the euro area.
Source: Eurostat and OFS, Press release, Series 13 – Social protection, 12 May 2005.
An even more urgent reform, currently being discussed, involves disability insurance, which is accumulating deficits. To stem the sharp rise in the number of beneficiaries, the proposal seeks to intensify early detection of people at risk of becoming long-term beneficiaries and to facilitate their return to work. These proposals are a step in the right direction, even though their limited short-term effect makes supplementary financing inevitable. In fact, most of the deficit is due to the entitlements of current pensioners which cannot be reviewed and a better control of the inflow has only a long-term effect. The additional resources should not substitute for efforts to keep spending under control, which would be assisted by a strict separation of disability insurance financing from that of the basic old age system and of other administrations. The effectiveness of the proposed measures will depend on how they are implemented. Since the difficulties leading to disability often have non-medical causes, the already existing case-by-case approach has to be strengthened using a multidisciplinary approach entailing enhanced co-operation amongst the various social services (disability, health, employment). Since 2002, firms have become more and more aware of the costs of invalidity pensions. Reacting to the evolution of the financial markets, private and mutual institutions running pension funds started to charge firms with experience-rated contributions largely based on the risk of invalidity (as was already the case before for the daily allowances in the sickness insurance. Incentives to firms to avoid invalidity pensions are useful to the extent that firms have a strong influence on access to disability pensions, but they need to be applied in such a way as to avoid discouraging the recruitment of persons with health problems.
Occupational benefit funds have improved their financial position since 2002, thanks to rebounding financial markets and the various measures taken, such as greater flexibility in minimum yield rates. Yet further reforms are still needed. The recently decided cut in the rate for converting retirement savings into annuities for people in the compulsory second-pillar scheme would not seem sufficient, given longer life expectancy and the likelihood of low nominal yields in a low inflation environment. A further cut in this rate seems necessary. The growing use of early retirement financed by second-pillar funds, contributions to which are tax deductible, should also be curtailed. To avoid misuse of the tax benefits attaching to such pensions, the minimum age for receiving second-pillar early retirement pensions was raised from 55 to 58. These measures could be complemented by a decrease in the ceiling on tax breaks. The budgetary cost of the subsidies cannot be justified by their positive effect on private saving, since the effect on national saving is likely to be minimal. Furthermore, the tax breaks are regressive because of the progressiveness of the tax schedule and constitute implicit government financing of early retirement for the wealthiest workers, which spurs similar demands from those of more modest means. At the same time, the conditions favouring the employment of older workers should be improved. Reducing the progressive nature of contributions to the second pillar of the pension system, which now rise as a function of age, would be welcome, but transitional issues are difficult to overcome.
How can health system costs be better controlled?
There is consensus on the need to reform the health care system. But implementing changes is difficult, as shown by the failure to overhaul the health insurance system in late 2003. Yet the status quo is not tenable from the financial point of view, and it would seem necessary to adopt a set of coherent measures, even if some of these entail limitation of choice. In this spirit, the government has presented Parliament with a large number of reforms, which usefully clarify the logic of the system in terms of regulated competition, even though international experience suggests that deeper reforms should be envisaged in some domains. This would strengthen incentives to control prices and the supply of health care. This is especially so in the case of the proposed abolition of the requirement to contract with all health care providers, which would give insurers greater ability to negotiate medical fees with individual providers and to control the number of medical acts, whereas, at present, the number of medical acts is not subject to an effective control. Collusive practices during fee negotiations, between both suppliers and insurers, have to be excluded to ensure effective competition. The latter would be strengthened if the market was better integrated by removing barriers induced by the canton-based organisation of both health supply and insurance, which narrows the scope for effective competition. The shift to a prospective hospital financing system based on Diagnosis Related Groups from a retrospective one based on bed days should also prompt cost consciousness. Nevertheless, the continuation of joint hospital financing by the insurers and by the cantons limits the incentives for each party to rationalise the supply of hospital care, cut costs and increase the use of outpatient care. A shift to cantonal subsidies allocated directly to funds could probably overcome some of these difficulties, provided that it is combined with efficient freedom to contract for health insurers also in the area of hospital services. A lowering of high drug prices will entail reducing the obstacles to imports. Generic drugs that have been authorised for sale in the European Union should be made more readily available, for example based on the simplified admission procedure foreseen in the law on medical products and medical devices. High drug prices having been widely criticized, the government intends to obtain price decreases of existing reimbursed drugs by revising them more frequently (15 years after initial admission, 2 years after patent expiration date). An extension of the panel of reference countries is discussed, by adding additional countries which have a pharmaceutical research capacity. Mindful that prices received by companies across all markets have an effect on research and development expenditures and ultimately, the number of new drugs coming on line, the need for incentives for research and development by pharmaceutical companies will be taken into consideration in the pricing process. Achievements in R&D can be reflected in an innovation surcharge being added to the daily treatment cost of the reference drug although calibrating this surcharge remains delicate. Such decisions are taken after consultation with the Swiss Drug Committee where the pharmaceutical industry is represented. Targeting co-payments better on the most price-elastic demand for care (drugs, outpatient care) would also help to contain spending.
How can the effectiveness of government interventions be raised?
Efforts have been made to modernise the administration and enhance the effectiveness of government action. Foremost amongst these is the renovation of federalism, which aims at ensuring that those who decide on outlays also fund them. Rapid implementation of this project, which has been under way for several years, is desirable since it would foster more effective use of public funds thanks to a better division of tasks between the Confederation and the cantons, and better budgetary relations between levels of government. Also, the recent initiative to develop a “culture of effectiveness” in the federal government will help. This initiative should be coupled with increased use of benchmarking of the cost and effectiveness of government programmes at lower levels of government. For example, the publication of government employment and pay statistics at the federal and cantonal levels, and for major cities, by area of spending would probably help to moderate operating costs. Efforts to catch up in the development of e-government would be another way to foster effectiveness.
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For further information please contact the Switzerland Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Claude Giorno and Florence Jaumotte under the supervision of Peter Jarrett.