Net pension replacement rates: Mandatory and voluntary schemes

For the 18 OECD countries where the calculations cover only public pensions, the net replacement rate for a full-career average earner is 71% on average (Table 4.5). For the 10 OECD countries with public and mandatory private provision, but no voluntary schemes the average net replacement rate is 59%. In the 10 remaining countries where voluntary pensions are modelled the average net replacement rate is 47% from mandatory schemes and reaches 67% for a worker contributing for the whole career.

For the other major economies, although there is a wide variation between country and across earnings level, there is a smaller difference between gross and net replacement rates as both earnings and pensions are not normally liable for any taxation with only social security contributions being deducted.

Twelve countries have mandatory private pensions, including a subset of four countries – Denmark, the Netherlands, Sweden and the United Kingdom – having private pensions that ensure near-universal coverage and so are described as “quasi-mandatory”. In Switzerland, private pensions are defined benefit while in the other countries they are defined contribution.

Replacement rates are shown for ten countries where voluntary private pensions have broad coverage. For the other large economies, South Africa also has a significant voluntary scheme. The rules that have been modelled are in the “Country Profiles” available at http://oe.cd/pag. In all countries a defined contribution plan is modelled.

In general, the defined contribution schemes pay a constant gross replacement rate with earnings. Data on actual contribution rates by earnings are not available for some countries, and so in these cases an average or typical rate is assumed across the earnings range. Progressive tax rules mean that the net replacement rate differs across the earnings range even if gross replacement rates are similar. The difference between the gross and net replacement rates often increases as earnings levels rise as the previous work earnings are taxed at much higher rates as individuals move up the earnings distribution.

The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking account of personal income taxes and social security contributions paid by workers and pensioners. Otherwise, the definition and measurement of the net replacement rates are the same as for the gross replacement rate. Details of the rules that national tax systems apply to pensioners can be found in the online Country Profiles available at http://oe.cd/pag.

Legal and rights

This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Extracts from publications may be subject to additional disclaimers, which are set out in the complete version of the publication, available at the link provided.

© OECD 2023

The use of this work, whether digital or print, is governed by the Terms and Conditions to be found at https://www.oecd.org/termsandconditions.