The final tally What is left at the end of life?

Issue: 4 / 2014
How much do the Swiss have left in their wallet after life's major and minor expenses? Assets, inheritance and disposable income at a glance.

Assets provide no benefits; they simply serve to smooth over consumption during a life-cycle – or so the Italian economist Franco Modigliani (1918-2003) believed. He was awarded the Nobel Prize in 1985 for his life-cycle hypothesis. According to his theory, people save throughout their working years in order to consume their assets in old age and up to death – which is known in advance in the model calculation. Two major points undermine Modigliani's theory. In practice, we don't know when we'll die; and assets are passed on in the form of inheritance.

In Switzerland some CHF 30 billion francs are passed on annually. In 2000, the average amount inherited per deceased was CHF 450,000 Swiss francs, not including the 25% of those who die without leaving behind an estate. The average inheritance was CHF 180,000 Swiss francs. However, one-third of the population never inherits any money. As we see, inheritance is a highly irregular phenomenon: 45% of heirs receive 98% of the total amount inherited. Inheritance is thus on the whole as unevenly distributed as assets. In other words, inheriting strengthens the asset concentration – those who already have, receive more.

According to the latest federal tax statistics, there are 10,500 people in Switzerland with net assets of more than CHF 10 million Swiss francs. They make up less than 0.5% of those subject to wealth tax but own 26% of total private assets. The "richest 300" according to Bilanz magazine have an estimated wealth of CHF 564 billion francs, that is nearly as much as Switzerland's annual gross domestic product.

The 2013 Global Wealth Report by Credit Suisse provides an international comparison of the concentration of wealth. According to this report, the distribution of wealth in Switzerland is almost as uneven as it is in Sweden, and more uneven than in Germany or France, although it is more even than in the US. In addition, the concentration of wealth and average assets vary between cantons. The average net assets per person subject to tax are almost CHF 300,000 Swiss francs in Switzerland. The cantons with the highest average wealth are Nidwalden and Schwyz with more than CHF 870,000 Swiss francs, and Jura and Solothurn are at the bottom of the list with CHF 120,000 Swiss francs. Within the cantons, wealth is distributed most unevenly in Basel-Stadt and Geneva, and most evenly in the canton of Uri.

Retirees grow assets

Three-quarters of all assets are passed on to the closest family members, that is, to children and spouses. Some 60% of the total inheritance goes to children. Only 10% of estates are passed on to non-relatives or organizations. With the population's increasing life expectancy, the age of the heirs has also increased. Only a quarter of the assets passed on go to heirs under age 50. This figure is bound to shrink further. The most significant portion of estates goes to 50 to 64 year olds. And as the age of heirs increases, inheritances are being used for different purposes than in the past. Life decisions like setting up businesses or family planning are typically completed, and the inheritance is added to pre-existing, saved assets. As a result, the 65+ demographic in the canton of Zurich has average taxable assets of CHF 950,000 Swiss francs. In contrast to the economic theory of Franco Modigliani, retirees do not consume their assets in retirement but rather grow them. The most frequent form of inheritance is cash or bank deposits. Real estate makes up one-third of total inheritances.

Controversial inheritance tax

In contrast to many other European countries, Switzerland does not have a national inheritance tax. The collection of inheritance and gift tax falls under the jurisdiction of the cantons, and the tax rate varies significantly. The canton of Schwyz does not collect any inheritance or gift tax whatsoever. In the other cantons, the surviving spouse and, in some cases, the direct descendants are exempt from paying inheritance tax. Income from inheritance and gift tax was CHF 862 million Swiss francs in 2011, or 1.3% of the total tax revenues for the cantons and municipalities.

An initiative launched in March 2013 for inheritance tax reform is looking to introduce a national inheritance tax and eliminate cantonal regulations. Instead, the cantons would receive one-third of the revenues, while two-thirds would be allocated to the Swiss Federal Social Security Fund. The initiative's backers propose a tax rate of 20% and a one-time exemption of CHF two million 2 Swiss francs million per estate; only spouses would be completely exempt from the tax. From an economic perspective, an inheritance tax has the advantage of causing little or no market distortion, and it is relatively efficient as a method of reallocation. By contrast, such a tax has numerous unwanted side-effects such as double taxation of assets and inheritance, the threat to company successions, and the potential to avoid the tax through lifetime giving. Whether you see inheritance tax as positive or negative therefore depends on your political inclination.

What is left at the end of the month?

How much money the Swiss inherit is less important in daily life than the question of how much money they have left over at the end of the month. The answer can vary greatly depending on where you live. Many households could improve their budgets by moving elsewhere. Considerable savings are sometimes possible just a few miles down the road. Alongside differing tax burdens, disposable income is determined by a number of other factors. Living costs, health insurance premiums, family allowance amounts and commuting costs vary significantly between places of residence. For middle-class households, living costs and health insurance premiums are critical, the importance of the tax rate increases with income. Disposable income represents the amount available to a household after deducting all mandatory charges and fixed costs.

Source: Credit Suisse

Author: Credit Suisse

As one of the world's leading banks, Credit Suisse is committed to delivering its financial experience and expertise to corporate, institutional and government clients in Switzerland.

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