Mandatory pension contributions
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 2020. 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.
Table 8.1 presents the 34 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 11 countries within this group, Austria, the Czech Republic, Denmark, Finland, Germany, Iceland, Italy, Lithuania, Luxembourg, Slovenia and Turkey, where contributions also finance disability or invalidity benefits. The average effective contribution rate in this group equalled 18.2% at the average-wage level in 2020. The highest total mandatory contribution rates are found in Italy at 33.0%. The Czech Republic, France and Greece also have high effective contribution rates, around 26-28%. By contrast the mandatory contribution in Mexico amounts to only 6.275%, but will increase to 15% over the next few years (Chapter 1). In Korea and Lithuania, the contribution rates are also 9% or lower, with Lithuania having recently moved all contributions to employees with no obligation for the employer. In both Australia and Canada, tax-financed components play a large role and so contribution rates to earnings-related schemes are close to 10%. The same is true for New Zealand, but as there is no mandatory earnings-related scheme the contribution level is zero.
The average effective contribution rate to the public schemes is 15.4% compared to 2.8% for private schemes, which makes a total of 18.2%. Within the public scheme employee contributions are around two-thirds of those of employers, representing effective contribution rates of 6.2% and 9.2%, respectively. In Slovenia, the split is almost reverse, as employees pay 15.5% compared to 8.85% for employers. In Australia and Estonia, 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 have to contribute fully to all parts. Within this group, for an average earner in 2020, the contribution rate is 15.1% in Ireland, 20.4% in the United Kingdom and 28.3% in Spain.
Countries with higher pension contribution rates often have above average pension benefits (as in the case of France, 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.