Pay-As-You-Go Financing with Reserve Fund (Bedarfsdeckungsverfahren)
This financing method for social and pension systems sets contributions for a given period so that they cover exactly the benefits expected in that period plus the build-up of a fluctuation reserve.
Concept
Pay-as-you-go financing with a reserve fund (Bedarfsdeckungsverfahren) is an intermediate form between pure pay-as-you-go financing and fully funded financing for social insurance and pension systems. Contributions for an accounting period are set not only to cover benefits payable in the same period, but also to allow the build-up of an appropriate fluctuation reserve, cushioning short-term fluctuations in contribution income or benefit expenditure.
Application in Switzerland
In Switzerland, the AHV is financed according to a variant of this method: unlike pure pay-as-you-go financing, which theoretically builds no reserves, the AHV maintains a compensation fund (AHV Fund) that serves as a fluctuation reserve and provides a degree of financial buffering against demographic and economic fluctuations, without aiming for full funding of future obligations.
Relevance Compared to Other Methods
Unlike fully funded financing, which builds individual reserve capital for each insured person, pay-as-you-go financing with a reserve fund, like pure pay-as-you-go, remains heavily dependent on the principle of solidarity between generations and the working population; the size of the compensation fund is therefore regularly the subject of political debate on the long-term financial sustainability of social insurance.