Aging and the financing of social security in Switzerland

Demographic projections forecast a doubling of the dependency ratio until 2050 as well as an increase of 10% in population due to longer life expectancy in Switzerland.To quantify the effects on social security and public finances, we use a computational overlapping generations model with five margins of labor supply: labor market participation, hours worked, job search, retirement, and on-the-job training. Starting with a passive fiscal strategy, we find that aging might reduce per capita incomeby 20 percent and necessitate a long-run increase of wage taxes and social security contributions by 21 percentage points. A comprehensive reform package, including an increase in the effective retirement age to 68 years and several other measures, may limit the tax increases to 4 percentage points of value added tax and reduce thedecline of per capita income to less than 6%.