The indicators of pension entitlements that follow here in Chapter 4 use the OECD cohort based pension models. The methodology and assumptions are common to the analysis of all countries, allowing the design of pension systems to be compared directly. This enables the comparison of future entitlements under today’s parameters and rules.

The future gross replacement rate shows the level of pension benefits in retirement from mandatory public and private pension schemes relative to earnings when working. For full-career workers with average earnings, the future gross replacement rate averages 53% for men and 52% for women in the 35 OECD countries, with substantial cross-country variation. At the bottom of the range, the United Kingdom offer future replacement rates of 22% at the average wage to people starting work at age 20 today. The Netherlands, at the top of the range, offers replacement rates of slightly less than 97%.

Private pensions play large role in about half of OECD countries. For mandatory schemes, the OECD average for gross replacement rates of an average earner from public schemes alone is 41%, compared with 53% with private pensions included. When voluntary private pensions are taken into account, the OECD average increases to 59%. For the eight OECD countries where voluntary private pensions are widespread the average replacement rate is 63% for an average earner choosing to contribute compared with 37% when only mandatory schemes are considered.

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 earned 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.

Whilst the gross replacement rate gives a clear indication of the design of the pension system, the net replacement will matter more to the individual, as it reflects their disposable income in retirement in comparison to when working. For average earners, the net replacement rate from mandatory pension schemes averages 63% across the OECD, which is 10 percentage points higher than the average gross replacement rate. This reflects the higher effective tax and social contribution rates that people pay on their earnings than on their pensions in retirement, mostly due to the progressivity of tax systems, some tax advantages to pensions and the absence of pension contributions on pension benefits. Net replacement rates vary across a large range, from less than 30% in Mexico and the United Kingdom to over 100% in the Netherlands and Turkey for average-wage workers. For low earners (with half of average worker earnings), the average net replacement rate across OECD countries is 73% while it is 59% for high earners (150% of average worker earnings).

The OECD average for net replacement rates of an average earner from public and mandatory private schemes is 63%. When voluntary private pensions, are added, the average net replacement rate is 69%. When voluntary private pensions are taken into account, for the eight OECD countries where voluntary private pensions are widespread the average net replacement rate for these eight countries is 74% compared with 62% in gross terms.

Pension wealth relative to individual earnings measures the total discounted value of the lifetime flow of all retirement incomes in mandatory pension schemes at retirement age. For average earners, pension wealth for men is 9.9 times and for women 10.9 times annual individual earnings on average in OECD countries. Gross pension wealth relative to annual individual earnings is higher for women because of their longer life expectancy. The main determinants of differences across countries are differences in the gross replacement rate, in the length of the retirement period measured by remaining life expectancy at the normal retirement age, and in indexation rules.

As with gross pension wealth, net pension wealth relative to individual net earnings measures the total discounted value of the lifetime flow of all retirement incomes in mandatory pension schemes at retirement age. For average earners, net pension wealth for men is 11.8 times and for women 13.1 times annual individual net earnings on average in OECD countries. Net pension wealth relative to annual individual earnings is higher for women because of their longer life expectancy. The main determinants of differences across countries are differences in the net replacement rate, in the length of the retirement period measured by remaining life expectancy at the normal retirement age, and in indexation rules.

The future gross replacement rate shown in indicator 4.2 for the average-wage worker assumes that this worker earns the average wage all along her or his career from age 20 (baseline case). The indicator here assumes a wage-age profile, with the relative wage increases until age 50. It computes the replacement rate assuming that over the whole career the average wage is the same as someone earning the average wage all along. Such a varying relative wage with age has little impact on replacement rates relative to the baseline case, with the average gross replacement rate remaining at 53%.