Net pension replacement rates: Mandatory and Voluntary schemes

For the 17 OECD countries where the calculations cover only public pensions, the net replacement rate for a full-career average earner is 73% on average. For the 10 OECD countries with public and mandatory private provision, but no voluntary schemes the average net replacement rate is 61%. In the 11 countries where voluntary pensions are modelled the average net replacement rate is 47% from mandatory schemes and reaches 70% for a worker choosing to contribute 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 pensions are not normally liable for any taxation.

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 the Netherlands and Switzerland, private pensions are defined benefit while in the other countries they are defined contribution.

Replacement rates are shown for 11 countries where voluntary private pensions have broad coverage. For the other economies South Africa also has a significant voluntary scheme. It is assumed that workers with voluntary private pensions spend a full career in the scheme.

The rules that have been modelled are in the “Country Profiles” available at http://oe.cd/pag. In ten of the 11 countries, a defined contribution plan is modelled, with a defined benefit schemes applying in Japan.

In general, both the defined contribution and defined benefit schemes pay a constant gross replacement rate with earnings. (Data on actual contribution rates by earnings are not available for most countries, and so an average or typical rate is assumed across the earnings range). However, progressive tax rules mean that the net replacement rate differs across the earnings range. Whilst the increase in gross replacement rate is generally constant across earnings the net replacement rate tends to increase more with earnings 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.

Disclaimers

This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Members of the OECD.

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.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Note by Turkey
The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

Note by all the European Union Member States of the OECD and the European Union
The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

Revised version, December 2021

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