The AHV was established in 1948, as a direct successor to the Income Substitution Insurance for Militia Soldiers (LVEO) set up during the Second World War. The LVEO not only shaped the AHV politically, but also in terms of its organization. Notably, the state old age insurance adopted the contributions system as well as the compensation model of the LVEO for processing contribution and pension payments. The essential features of this system have remained unchanged to this day.

Organization: Equalization Funds, Central Compensation Fund and Social insurance number

The AHV act of 1946 stipulated that the contributions and pension expenditures had to be achieved by means of equalization funds. This compensation process occurred on three levels: a) on the level of individual companies, b) cantonal and industry-related equalization funds, and c) on the national level with the Central Compensation Office (ZAS). Employers' associations played an important role in the organization of the approximately 100 equalization funds. They had also been in charge of managing equalization funds in connection with the LVEO. This delegation of administrative duties to private associations was retained in the AHV. In contrast, ZAS is a federal institution based in Geneva and was a product of a predecessor LVEO organization too.

Within this system, each equalization fund bills the next-highest institution for the balances that arise from its contributions and expenditures flows. This balances out any differences that emerge depending on the age structure of policyholders and pension beneficiaries that vary across company, industry and region. The ZAS ensures that equalization funds across the country are balanced and offset with the overarching AHV Central Compensation Fund. This constitutes the actual reserves of the AHV. Federal subsidies to the AHV are paid into the Central Compensation Fund managed by an administrative council appointed by the Federal Council. AHV pensions are not paid directly by individual firms as had been originally envisaged. Today, this task remains the responsibility of the equalization funds.

In addition, ZAS keeps a central register of policyholders, while individual contributors’ accounts are managed in a decentralized manner by the equalization funds. In 1948, insurance number punch cards were introduced in order to identify policyholders and determine benefit claims – followed eventually by a computer-readable system. The insurance number comprises information on date of birth, sex, nationality and initials, all in the form of digits. In 2007, an anonymous 13-digit AHV insurance number replaced these ‘readable’ numbers for data security reasons. The number is also used in other social insurance programs and for administrative purposes.

Despite the decentralized compensation system and the importance of monies flowing into the system, the administration of the AHV has remained relatively streamlined. In 2002, the purely administrative costs for the AHV (first pillar) amounted to around 800 million francs, or 134 francs per person insured. In contrast, administration costs for occupational provision (second pillar) totals at 499 francs per person insured. However, these amounts can only be compared to a limited extent due to the different structures and conditions that exist for each pension 'pillar'.

Funding: Pay-as-you-go, Payroll Contributions and Federal Subsidies

The AHV has been funded according to a pay-as-you-go system since its inception. The contributions received are used directly for ongoing benefits. Contributors and beneficiaries are thus not the same: a portion of national income is continually transferred from the workforce to pensioners. Unlike the funded financing model in which workers gradually save for their own retirement by way of contributions, the AHV accrues only limited reserves. The law stipulates that the AHV Central Compensation Fund should cover 12 months of pension expenditures.

Due to its funding and pension model, the AHV has been a solidary social insurance since its foundation. Contributions and pensions witness a certain degree of social redistribution. The redistribution effect is primarily based on the fact that the contributions (payroll contributions) have to be paid on the whole income, while pension benefits levels are capped. Although workers with particularly high salaries also pay high AHV contributions, they do not receive more than the maximum pension when they retire – which is only twice as high as the minimum AHV pension. In other terms, this means that men and women earning low wages throughout their lives receive higher pensions relative to their contributions when compared to high-wage earners. However, this redistribution effect is offset by the other components of the three-pillar system that, on the whole, barely modifies the unequal distribution of income.

The AHV has been financed by policyholders’ payroll contributions and state subsidies, particularly revenues from alcohol and tobacco duties, since 1948. A percentage of value added tax has also been used to fund the AHV since 1999. Furthermore, tax revenues from casino duties have been earmarked for the AHV since 2000. In 2011, the sources of AHV income were as follows: payroll contributions: 74 per cent, federal subsidies: 19 percent, value added tax: six per cent, casino duty: one per cent.

Originally, the payroll contributions paid by policyholders amounted to four percent of the wage; this amount was then split two ways among employers and employees in 1948. With the expansion of the AHV, contributions increased to 8.4 per cent (7.8 per cent for the self-employed) between 1969 and 1975. They have since remained unchanged. The original AHV law stipulated fixed contributions for the Confederation and cantons: 160 million francs per year, two thirds of which would be borne by the Confederation and in particular by alcohol and tobacco duties. The sixth AHV revision (1963) set the level of state subsidies to at least 20 per cent of AHV expenditure. In 1975, in response to the economic slump, however, Parliament sharply reduced the federal contributions. It was gradually raised again until the mid-1980s. The cantons were finally relieved from their financial responsibility for the AHV with the new inter-cantonal financial compensation law of 2008. The contribution paid by the Confederation has since covered 19.55 per cent of AHV expenditures.

AHV inflows were usually higher than its expenditures until the mid-1970s. The growth of wages and the adjustment of contribution rates around 1969 made it possible to raise the level of benefits. Since the 1980s, expenditures have once again been surpassed by AHV inflows. The exceptions are the second half of the 1990s when the AHV compensation fund temporarily fell below the minimum of one year’s expenditures, as well as 2002 (new economy crisis) and 2008 (financial crisis). Following a capital transfer to disability insurance, the AHV reserves amounted to around 40 billion francs in 2011. Income including capital gains totaled 39 billion francs and expenditure 38 billion in 2011.