copy the linklink copied!Tax treatment of pensions and pensioners

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Key results

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 labour 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.

More than half (20 out of 35) OECD countries provide older people with additional basic relief under the personal income tax. Generally, this takes the form of an extra tax allowance or tax credit. In many cases – Canada and the United Kingdom, for example – this additional relief is phased out for older people with higher incomes.

A significant number of countries offer tax relief for particular sources of retirement income. Relief from income tax for public pensions, either full or partial, is available in 14 OECD countries. For example, between 15% and 50% of income from public pensions in the United States (social security) is not taxed, depending on the total income of the pensioner. In Australia, for example, benefits derived from pension contributions, and investment returns, which have both been taxed, are not taxable in payment for over 60s. This applies to the mandatory defined contribution scheme and voluntary contributions to such plans.

By contrast some countries such as Denmark, Iceland, the Netherlands and Sweden tax earned income from work less than pensions.

Overall, 28 OECD countries have some concession for older people or pension income under their personal income taxes. In only eight countries is the tax treatment of pensions and pensioners at least the same as it is for people of working age.

Virtually all OECD countries levy employee social security contributions on workers: Australia and New Zealand are the only exceptions. In addition to these two countries, a further 19 do not levy social security contributions on pensioners. The rate of contributions in the 15 countries that do levy social security contributions on retirees is always lower than the rate charged on workers. Typically, old-age retirement income is not subject to contributions for pensions or unemployment (for obvious reasons). However, pensioners can be subject to levies to pay for health or long-term care and, in some cases, are liable for “solidarity” contributions to finance a broad range of benefits.

Empirical results

The chart shows the percentage of income paid in taxes and contribution by workers and pensioners.

Starting with workers, countries have been ranked by the proportion of income paid in total taxes (including social contributions) at an average earner level. This is then compared to the total tax rate paid by a pensioner after a full-career at the average wage, hence receiving the gross replacement rate in the base case (Table 5.1, as set out in the indicator “Gross pension replacement rates” above).

In eight OECD countries and six other major economies, such a pensioner would not pay any tax in retirement. In some cases, such as the Slovak Republic and Turkey, this is because pensions are not taxable. In the United Kingdom it is because the pension income would be less than the income-tax personal allowance offered to older people. Pensioners with the gross replacement rate of a full-career average earner would pay 11% of their income in taxes and contributions on average across the OECD. By comparison, taxes and contributions paid by an average earner – so not including any contributions from the employer – average 26% of the gross wage in OECD countries and 13% in other major economies.

The last series in the chart comparison show how much a pensioner would pay if his income before tax is equal to the gross average wage. The total tax rate is 18% on average in OECD countries, some eight percentage points lower than what workers’ pay (including contributions) with the same level of earnings.

The difference between this 18% rate for pensioners with an income equal to average earnings and the 11% paid in taxes and contributions paid on the income which is equal to the gross replacement rate for an average earner illustrates the impact of progressivity in income-tax systems for pensioners.

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Table 5.4. Treatment of pensions and pensioners under personal income tax and mandatory public and private contributions

  

Extra tax

Full or partial relief for pension income

Mandatory contributions on pension income

  

Extra tax

Full or partial relief for pension income

Mandatory contributions on pension income

Allowance/credit

Public scheme

Private scheme

Allowance/credit

Public scheme

Private scheme

Australia

None

Netherlands

Low

Austria

Low

New Zealand

None

Belgium

Low

Norway

Low

Canada

None

Poland

Low

Chile

None

Portugal

None

Czech Republic

None

Slovak Republic

None

Denmark

None

Slovenia

Low

Estonia

None

Spain

None

Finland

Low

Sweden

None

France

Low

Switzerland

Low

Germany

Low

Turkey

None

Greece

Low

United Kingdom

None

Hungary

None

United States

None

Iceland

None

Ireland

Low

Israel

Low

Argentina

Low

Italy

None

Brazil

None

Japan

Low

China

None

Korea

None

India

None

Latvia

None

Indonesia

None

Lithuania

None

Russian Federation

Low

Luxembourg

Low

Saudi Arabia

Low

Mexico

None

South Africa

None

Source: See online “Country Profiles available at http://oe.cd/pag.

 StatLink https://doi.org/10.1787/888934041516

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Figure 5.3. Personal income taxes and social security contributions paid by pensioners and workers
Figure 5.3. Personal income taxes and social security contributions paid by pensioners and workers

Source: OECD pension models; OECD tax and benefit models.

 StatLink https://doi.org/10.1787/888934041535

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