The indicators of pension entitlements that follow here in use the OECD cohort based pension models. The methodology and assumptions are common to the analysis of all countries, allowing the design of pension systems to be compared directly. This enables the comparison of future entitlements under today’s parameters and rules.

The future gross replacement rate shows the level of pension benefits in retirement from mandatory public and private pension schemes relative to earnings when working. For workers with average worker earnings (AW), the future gross replacement rate averages 53% for men and 52% for women in the 34 OECD countries, with substantial cross-country variation. At the bottom of the range, Mexico and the United Kingdom offer future replacement rates of around 25-30% of average earnings to people starting work today. The Netherlands, at the top of the range, offers replacement rates of slightly more than 90%.

Private pensions play a large and growing role in providing incomes for old age. The OECD average for gross replacement rates of an average earner from public schemes alone is 41%, compared with 53% with mandatory private pensions included. When voluntary private pensions are taken into account the OECD average increases to 58%. For the seven OECD countries where voluntary private pensions are widespread the average replacement rate is 60% for an average earner compared with 37% when only mandatory schemes are considered.

The personal tax system plays an important role in old-age support. Pensioners often do not pay social security contributions. Personal income taxes are progressive and pension entitlements are usually lower than earnings before retirement, so the average tax rate on pension income is typically less than the tax rate on earned income. In addition, most income tax systems give preferential treatment either to pension incomes or to pensioners, through additional allowances or credits to older people.

For average earners, the net replacement rate from mandatory pension schemes averages 63% across the OECD, which is 10 percentage points higher than the average gross replacement rate. This reflects the higher effective tax and contribution rates that people pay on their earnings than on their pensions in retirement. Net replacement rates vary across a large range, from less than 30% in Mexico to 105% in Turkey for average-wage workers. For low earners (with half of average worker earnings), the average net replacement rate across OECD countries is 75%. For high earners (150% of average worker earnings) the average net replacement rate is 58%, lower than for low earners. The differences across earnings levels reflect the progressive features of pension systems, such as minimum benefits and ceilings on pensionable earnings, the progressivity of the tax system and various tax measures that favour pension income.

Since gross mandatory and voluntary pension systems are playing an increasing role in providing income for old age it also is equally important to look at the net replacement rate. The OECD average for net replacement rates of an average earner from public and mandatory private schemes alone is 63%. When voluntary private pensions, are added, the average net replacement rate is 68% for an average earner. When voluntary private pensions are taken into account, for the seven OECD countries where voluntary private pensions are widespread the average net replacement rate for these seven countries is 72% compared with 60% in gross terms.

Pension wealth relative to individual earnings measures the total discounted value of the lifetime flow of all retirement incomes in mandatory pension schemes at the point of retirement age. For average earners, pension wealth for men is 9.5 times and for women 10.8 times annual individual earnings on average in OECD countries. Gross pension wealth relative to annual individual earnings is higher for women because of their longer life expectancy.

Net pension wealth, like the equivalent indicator in gross terms, shows the present value of the lifetime flow of pension benefits in mandatory pension schemes. But it also takes account of taxes and contribution paid on retirement incomes. Both figures for pension wealth are expressed as a multiple of individual gross earnings.