copy the linklink copied!Mandatory pension contributions
Total mandatory effective pension contribution rates for an average earner averaged 18.4% in 2018 for the 33 OECD countries that have specific pension contributions. In Ireland, Spain and the United Kingdom, mandatory contributions are not earmarked for pensions and cover social insurance.
Most of the measures presented in Pensions at a Glance look at the benefits side of the pension system. The indicators here look at the contribution side, mapping out how much workers contributed towards their pension in 2018. Tax-financed pension benefits are not covered here.
Since different pension components in a country can be financed through different income sources mapping out the pension’s contribution terrain is very important but it can also be difficult. This presentation aims to give a broad picture of the pension schemes modelled herein and where data are available.
Table 8.1 presents the 32 OECD countries where pension contributions are mandatory, either public or private, and New Zealand where there is no mandatory contributions. Countries that belong to this group have pension systems where the contribution rate paid is more directly linked to the pension system. However, there are still 12 countries within this group, Austria, the Czech Republic, Denmark, Finland, Germany, Iceland, Italy, Lithuania, Luxembourg, Poland, Slovenia and the United States, where contributions also finance disability or invalidity benefits. The average effective contribution rate in this group equalled 18.4% at the average wage in 2018. The highest total mandatory contribution rates are found in Italy at 33.0%. The Czech Republic, France and Poland also have high effective contribution rates, between 26% and 28%. By contrast the mandatory contribution in Mexico amounts to only 6.275%. In both Australia and Canada, tax-financed components play a large role and so contribution rates to contributory schemes are below 10%. The same is true for New Zealand, but as there is no mandatory earnings-related scheme the contribution level is zero.
The effective contribution rate to the public schemes is 18.1% compared to 9.1% for private schemes. Within the public scheme employee contributions are around two-thirds of those of employers, representing effective contribution rates of 7.5% and 10.6%, respectively. In Slovenia, the split is almost reverse, as employees pay 15.5% compared to 8.85% for employers. In Australia, Estonia and Iceland, all mandatory contributions are paid by employers, while in Lithuania employees pay total contributions.
Table 8.2 looks at social insurance contribution rates that apply for a private-sector worker in Ireland, Spain and the United Kingdom. For these three countries it is difficult to separate the pension contributions from the other parts of social insurance such as survivor’s benefits, disability benefits, unemployment, etc. In addition individuals cannot choose which systems to belong to and they therefore have to contribute fully to all parts.
The average contribution rate in this group is 21.2% for an average earner in 2018. The highest mandatory social insurance contributions are found in Spain at 28.3% and the lowest in Ireland at 14.75%.
Countries with higher pension contribution rates will often have above average pension benefits (as in the case of France, Iceland, Italy and the Netherlands). The choice of the contribution level should be the result of trading off lower net wages against higher future pensions. However, in addition higher mandatory contribution rates might hurt the competitiveness of the economy, and lower total employment while potentially increasing informality.
Further Reading
OECD (2019), Taxing Wages 2019, OECD Publishing, Paris, https://dx.doi.org/10.1787/tax_wages-2019-en.
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