Following the passing of the 13th month of pension referendum in March 2024, the Swiss government has been debating how to pay for the expanded benefit. Now, the Federal Council has announced that a value-added tax increase will be used to subsidise pensions in Switzerland.

13th month of AHV to cost Switzerland billions

Thanks to the vote on March 3, from 2026 all those who receive a first pillar pension (AHV / OASI) will be entitled to a 13th month of payment. Likened to a 13th month of salary included as part of some jobs in Switzerland, the extra benefit will amount to between 1.260 and 2.520 francs and apply to all pensioners in the alpine nation, regardless of income. Rather than topping up each monthly pension, it will be paid out as a lump sum every December.

With 58,2 percent of voters approving the 13th month of AHV, the government has attempted to devise a plan to pay for the benefit that would not force it to implement further austerity measures. The 13th month of pension is expected to cost 4,2 billion francs in 2026, increasing to 5 billion francs a year by 2030.

VAT rise to pay for expanded Swiss pensions

Therefore, the Federal Council announced that an increase in value-added tax would be used to pay for the 13th month of pension. Though a specific timeframe was not mentioned, the Federal Social Insurance Office (BSV) wrote that the “financial situation of the AHV and the federal budget require immediate measures to finance” the programme.

For reference, value-added tax or VAT is an extra charge added to all goods and services purchased in Switzerland. The top rate of VAT, applied to a majority of items, is 8,1 percent of the value of the good or service. Hotel and B&B stays are charged a 3,8 percent VAT, food, medicine, books and other media are charged a 2,6 percent VAT, while rent, education, culture and healthcare services and goods are exempt from the tax.

Swiss government plants 0,7 percent VAT hike

Under the plans, VAT will rise by 0,7 percentage points, up to 8,8 percent (standard rate), 4,5 percent (hotel rate) and 3,3 percent (reduced rate). While this would make practically everything in Switzerland more expensive for consumers, the BSV wrote that this would allow pension funds to remain financially stable until at least 2030.

Finally, the government has also committed to reverse part of its planned cut to AHV spending. Instead of contributing 18,7 percent of AHV programme funding from 2026, the federal government will now only reduce spending to 19,5 percent. This is expected to add an extra 450 million francs in funding to pensions by 2026.

13th month of AHV will be introduced on time, government assures

The Federal Council concluded that it would submit the VAT rise to parliament immediately, so that it may be discussed in the upcoming winter and spring sessions. They assured that even if lawmakers fail to approve the VAT rise by the end of 2025, the 13th month of pension will still be implemented on time in 2026.

As the plan involves a change to the tax code, the plans will eventually have to be approved by Swiss citizens at a referendum.

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