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Edward Whitehouse
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Retirement-Income
Systems in 53 Countries
Pensions
Panorama
Pensions Panorama
Pensions Panorama
Retirement-Income Systems in 53 Countries
Edward Whitehouse
THE WORLD BANK
WASHINGTON, D.C.
� 2007 The International Bank for Reconstruction and Development / The World Bank
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ISBN-10: 0-8213-6764-1
ISBN-13: 978-0-8213-6764-3
eISBN-10: 0-8213-6765-X
DOI: 10.1596/978-0-8213-6764-3
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Biographical Note
Edward Whitehouse works in the Social Policy Division of the Organisation for Economic
Co-operation and Development (OECD). While this volume was being prepared, he was
Director of Axia Economics, a London-based consultancy specializing in the micro-
economic analysis of public policy. He was also coeditor of the World Bank's Pension
Reform Primer program.
v
Contents
Biographical Note v
Background and Acknowledgments xi
Abbreviations xiii
PART I: CROSS-COUNTRY ANALYSIS
1 Introduction 3
2 Typology 5
3 Parameters 11
4 Modeling Pensions 25
5 Pension Entitlements 31
6 Net Pension Entitlements 35
7 The Link between Pensions and Earnings 39
8 Conclusions 43
PART II: COUNTRY STUDIES BY REGION
9 Introduction 49
10 High-Income OECD Countries
Australia 53
Austria 56
Belgium 59
Canada 62
vii
viii PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Denmark 65
Finland 68
France 71
Germany 74
Greece 77
Iceland 80
Ireland 83
Italy 86
Japan 89
Republic of South Korea 92
Luxembourg 95
The Netherlands 98
New Zealand 101
Norway 104
Portugal 107
Spain 110
Sweden 113
Switzerland 116
The United Kingdom 119
The United States 122
11 Eastern Europe and Central Asia
Bulgaria 127
Croatia 130
The Czech Republic 133
Estonia 136
Hungary 139
Latvia 142
Lithuania 145
Poland 148
The Slovak Republic 151
Turkey 154
12 Latin America and the Caribbean
Argentina 159
Chile 162
Colombia 165
Costa Rica 168
The Dominican Republic 171
El Salvador 174
Mexico 177
Peru 180
Uruguay 183
13 Middle East and North Africa
Algeria 189
Bahrain 192
Djibouti 195
The Arab Republic of Egypt 198
The Islamic Republic of Iran 201
CONTENTS ix
Jordan 204
Libya 207
Morocco 210
Tunisia 213
The Republic of Yemen 216
References 219
Index 221
Figure
7.1 The Link between Preretirement Earnings and Pension Entitlements
(Gross pension entitlement as a proportion of economywide average
earnings to individual earnings) 40
Tables
2.1 Structure of Pension Systems 6
3.1 Summary of Pension System Parameters, High-Income OECD Countries 14
3.2 Summary of Pension System Parameters, Eastern Europe and Central Asia 16
3.3 Summary of Pension System Parameters, Latin America and the Caribbean 17
3.4 Summary of Pension System Parameters, Middle East and North Africa 18
3.5 Earnings Measure and Valorization: Earnings-Related Schemes 19
3.6 Procedures for Adjustment of Pensions in Payment:
Earnings-Related Schemes 22
5.1 Gross Replacement Rates by Earnings Level, Mandatory Pension
Programs, Men (Percentage of individual preretirement gross earnings) 32
6.1 Net Replacement Rates by Earnings Level, Mandatory Pension
Programs, Men (Percentage of individual preretirement net earnings) 36
Background and Acknowledgments
THE ACCURATE PRESENTATION OF PENSION SYSTEMS OF A COUNTRY and the comparison of
systems across countries are crucial parts of policy analysis and reform. This is equally
valid for the high-income countries of the Organisation for Economic Co-operation and
Development (OECD) as it is for the low- and middle-income countries that are the
clients of the World Bank. Yet such presentations and comparisons are far from easy, and
they require a well-thought-through methodology, access to detailed information at the
country level, verification of information and outcome by country specialists, and a
network of pension experts who provide feedback and input and thus help improve the
product over time.
The calculation of pension entitlements uses the Axia Economics APEX (Analysis of
Pension Entitlements across Countries) model. This and the country models were devel-
oped with the financial support of the OECD (Directorate for Employment, Labour, and
Social Affairs, Economics Department; Directorate for Financial and Enterprise Affairs,
Centre for Tax Policy and Administration); the World Bank (Social Protection Department,
Middle East and North Africa Region, South Asia Region); the International Federation of
Pension Fund Administrators (FIAP); and Watson Wyatt (as part of the World Economic
Forum's "Global Pension-System Readiness" initiative).
I am especially grateful to Robert Palacios of the World Bank, who has provided
constant encouragement and inspiration (along with more mundane help in finding infor-
mation, particularly on Eastern Europe and Latin America). Monika Queisser of the
OECD's Social Policy Division contributed enormously to modeling the OECD countries
and coauthored the report Pensions at a Glance: Public Policies across OECD Countries
(OECD 2005; see also Queisser and Whitehouse 2006). David Robalino of the World Bank
provided information on the Middle East and North Africa and many fruitful method-
ological discussions (results for this region were published in Robalino et al. [2005]). Gordon
Keenay of KPMG modeled personal income taxes and social security contributions for the
30 OECD countries.
Numerous people have offered valuable information, advice, and encouragement.
These include Bernard Casey of the Pensions Institute, Cass Business School, City
University, London; Richard Disney, Professor of Economics at the University of
Nottingham; John Martin and Martine Durand, Director and Deputy Director, respectively,
of Employment, Labour, and Social Affairs at the OECD; Peter Hicks, Assistant Deputy
Minister, Social Development, Canada; Robert Holzmann, Sector Director of Social
xi
xii PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Protection and Labor at the World Bank; David Lindeman, formerly of the World Bank and
OECD; Montserrat Pallares-Miralles of the World Bank; Mark Pearson, Head of Social
Policy at the OECD; John Piggott, Professor of Economics at the University of New South
Wales; Anita Schwarz and Yvonne Sin of the World Bank; and David Stanton and Adair
Turner of the Pensions Commission in the United Kingdom. Delegates to the OECD
Working Party on Social Policy patiently helped us understand their countries' pension
systems and checked the modeling results.
The analysis has benefited from discussion at numerous events: a seminar at the
Centre for Pensions and Superannuation, University of New South Wales, April 2002
(Whitehouse 2002); the conference "Pension System Perspectives," Vilnius, December
2002; "Adequate and Sustainable Pensions through Private Provision: Lessons from and
for Reforms in Central and Eastern Europe," Tallinn, April 2003; a seminar at the Institute
of Ageing, University of Oxford, May 2003; World Bank workshops on pension reform in
Johannesburg, Malta, Cape Town, and Paris, February, June, July, and September 2003; a
seminar at the Directorate of Employment, Labour, and Social Affairs, OECD, Paris, July
2003; the conference "Financial Security in Retirement in Post-socialist Countries," Kiev,
October 2003; a seminar at the World Bank, Washington, DC, November 2003; a presenta-
tion at the OECD Working Party on Social Policy, Paris, November 2003; a joint OECD
and BMGS (Federal Ministry of Social Security, Germany) conference on "Sustainable
Old-Age Provision," Berlin, November 2004; a seminar at the Brookings Institution,
Washington, DC, May 2005; and at the APPAM Conference, Washington, DC, November
2005.
Full responsibility for the results rests with the author: any views expressed commit
neither the OECD Secretariat nor the World Bank nor any of their member governments.
Abbreviations
ACC Accident Compensation Corporation (New Zealand)
APEX Analysis of Pension Entitlements across Countries
ATI aggregate taxable income (Belgium)
ATP Arbeidsmarkedets Till�gspension (Denmark)
BMGS Federal Ministry of Social Security (Germany)
CSG contribution sociale generalis�e (France)
DB defined-benefit
DC defined-contribution
FIAP International Federation of Pension Fund Administration
GDP gross domestic product
ITP Industrins och handelns till�ggspension (Sweden)
Mig minimum income guarantee (United Kingdom)
OECD Organisation for Economic Co-operation and Development
PAYG pay as you go
PBU basic universal benefit (Argentina)
SA social assistance
S2P state second pension (United Kingdom)
UF Unidades de Fomento (Chile)
xiii
Part I: Cross-Country Analysis
1. Introduction
PENSIONS PANORAMA PROVIDES A COMPENDIUM OF FACTS and analysis that should inform
policy making and public debate about retirement-income systems around the world.
Robert Holzmann, Director of Social Protection at the World Bank, and Mark Pearson,
Head of Social Policy at the Organisation for Economic Co-operation and Development
(OECD), introduce the report.
Reforming pensions is a central policy issue in developed and developing countries
alike. However, it is challenging and controversial because it involves long-term planning
by governments faced with numerous short-term pressures. Pension reform usually pro-
vokes heated ideological debates and, often, street protests.
There are valuable lessons to be learned from other countries' pension systems and their
experiences of retirement-income reforms. However, national pension systems are very
complicated and international comparisons are consequently very difficult. Many interna-
tional analyses get bogged down in institutional, technical, and legal detail, making it
impossible to transfer policy lessons between countries. This study combines painstaking,
rigorous analysis with clear, easy-to-understand presentation of empirical results.
Pensions Panorama does not advocate any particular kind of pension system or type of
pension reform. We hope the analysis in this report can inform debates on retirement-
income systems by presenting "hard" data that people with different visions for the future
of pensions can all use as a reference point.
International comparisons of retirement-income regimes to date have tended to focus
on the question of fiscal and financial sustainability: whether the pension promises made
to today's workers will be affordable in the future. Much less attention has been paid to
the future adequacy of pension benefits, to the impact of pension reforms on the distribu-
tion of income among older people, and on the means to combat old-age poverty. These
issues, which may be termed social sustainability, are a core concern of this study.
The OECD published the report Pensions at a Glance: Public Policies across OECD
Countries in 2005. This study extends the analysis to cover 23 countries that are not mem-
bers of the OECD. These nations lie in three different regions of the world: Eastern Europe
and Central Asia, Latin America and the Caribbean, and the Middle East and North Africa.
Together, the countries covered in this report account for a quarter of the world's population
and approximately 58 percent of workers around the world who are covered by formal
pension systems.
Structure of the Report
The following section sets out a typology: a way of defining and classifying different kinds of
pension schemes. It shows which countries have which types of pension schemes, covering
all elements of the retirement-income system, including resource-tested benefits and basic
pensions as well as public, earnings-related, and compulsory private pension plans. Next,
the study sets out the institutional detail: the parameters and rules of different parts of
the retirement-income system. The parameters are followed by the methodology: How are
3
4 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
pension entitlements modeled? What assumptions are used? The baseline assumptions
will not be to everyone's taste, but the beauty of the pension models is that the value of
these variables may be changed.
The next section presents the core, empirical results: future pension entitlements of
today's workers with different levels of earnings from all sources. This section includes the
familiar replacement rate indicator: individual pension entitlements as a proportion of
individual earnings when working. The following section explores the important role that
personal income taxes and social security contributions play in determining the relative
incomes of older people. In particular, it shows net replacement rates (that is, pension net
of taxes and any contributions, relative to earnings, net of taxes and contributions). The third
section on empirical results looks at the link between pension entitlements in retirement and
earnings in work. This analysis highlights the key differences in philosophy between dif-
ferent countries' retirement-income systems. Moreover, changes to the pensions-earnings
link have been central to many recent reforms to retirement-income regimes.
Conclusions
The concluding section sets out a number of dimensions in which the pension systems of 53
countries differ. What is the target replacement rate? What weights are given to the objectives
of adequacy and insurance? How strongly are pension entitlements linked to earnings when
working? What are the relative roles of the public and private sectors? Are antipoverty bene-
fits universal or resource tested? Are insurance pensions provided through defined-benefit
systems, points schemes, notional accounts, or defined-contribution schemes?
These questions are central to pension policy making. This report's clarity, objectivity,
and rigor should contribute hugely to an improved debate on the future of retirement-
income systems.
Future Developments
The World Bank and the OECD aim to continue this productive cooperation over the
analysis of pension systems in a number of ways. First, the OECD, in cooperation with the
European Commission, is updating the models to parameters and rules for 2004. This cov-
ers the 36 countries that are members of the European Union or the OECD. Second, the
analysis of the OECD and European Union countries is being extended to look at pension
entitlements of workers who do not follow the full careers assumed in this report. For
example, many systems offer protection for people who have time out of paid work caring
for children. The effect of childcare absences on pension entitlements will be modeled. In
addition, the extended analysis will look at how retirement earlier or later than the normal
pension age affects pension benefits. Third, the pension models will be expanded to other
countries, with the first group being in Asia, including India and China.
This report represents a first, albeit a huge, step toward a consistent, rigorous empir-
ical analysis of pension systems and entitlements around the world. It should be a vital
starting point for anyone thinking about pensions or about reforming retirement-
income regimes.
Robert Holzmann
World Bank, Washington, DC
Mark Pearson
OECD, Paris
2. Typology
THERE HAVE BEEN NUMEROUS TYPOLOGIES OF RETIREMENT-INCOME SYSTEMS. The terminol-
ogy used in these categories has become very confusing. This paper uses a descriptive
classification that may be applied consistently to 53 countries with diverse retirement-
income systems.
The approach adopted here is based on the role and objective of each part of the pension
system. The framework has two mandatory tiers: a redistributive part and an insurance
part. Redistributive components of pension systems are designed to ensure that pension-
ers achieve some absolute, minimum standard of living. Insurance components are
designed to achieve a target standard of living for retirement that is based on the standard
of preretirement years.1 Within these tiers, schemes are further classified by their form
(public or private, defined benefit or defined contribution). This typology, therefore,
clearly separates form from function, and description from prescription. Table 2.1 summa-
rizes the pension systems of 53 countries, divided into the redistributive first tier and the
insurance second tier.
First-Tier, Redistributive Pensions
Nearly all countries have safety nets that aim to prevent poverty among older people.
These schemes, called first-tier, redistributive schemes here, can be of four different types:
basic pension schemes, separate targeted retirement-income programs, minimum pensions
within earnings-related plans, and social assistance. All of these are provided by the public
sector and are mandatory.
Basic
In basic pension schemes, the benefit is either flat rate, that is, the same amount is paid to
every retiree, or the amount is determined by the number of working years (not by past
earnings). Additional income from other sources does not change entitlement to the basic
pension.
Basic pension schemes are common in the high-income OECD countries (10 out of 24
countries) and in Eastern Europe and Central Asia (4 out of 10 countries). However, there
are no examples in the Middle East and North Africa and just one in Latin America and the
Caribbean.
Targeted
Targeted plans, in contrast, pay higher benefits to poorer pensioners and reduced benefits
to better-off retirees. The targeting takes three different forms. First, benefits may be
pension income tested (where the value depends only on the level of pension income a
retiree receives), broader income tested (reduced payments if, for example, a retiree has
income from savings), or broader means tested (reducing the pension to take account of
both income and assets). Some countries do not have specific, targeted programs for
older people, but poor older people are entitled to the same general social-assistance
5
6 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 2.1. Structure of Pension Systems
First tier: universal coverage, Second tier:
Tier: function redistributive mandatory, insurance
Provision Public Public Private
Type Targeted Basic Minimum Type Type
High-income OECD countries
Australia DC
Austria DB
Belgium DB
Canada DB
Denmark DB + DC DC
Finland DB
France DB + points
Germany Points
Greece DB
Iceland DB
Ireland
Italy n. acs.
Japan DB
Korea, Rep. of DB
Luxembourg DB
Netherlands DB
New Zealand
Norway Points
Portugal DB
Spain DB
Sweden n. acs. DB + DC
Switzerland DB defined credit
United Kingdom DB
United States DB
Eastern Europe and Central Asia
Bulgaria DB DC
Croatia Points DC
Czech Republic DB
Estonia Points DC
Hungary DB DC
Latvia n. acs. DC
Lithuania DB DC
Poland n. acs. DC
Slovak Republic Points
Turkey DB
Latin America and the Caribbean
Argentina DC
Chile DC
Colombia DC
Costa Rica DB DC
Dominican Republic DC
El Salvador DC
Mexico DC
Peru DC
Uruguay DB DC
(continued on the next page)
TYPOLOGY 7
Table 2.1. (continued)
First tier: universal coverage, Second tier:
Tier: function redistributive mandatory, insurance
Provision Public Public Private
Type Targeted Basic Minimum Type Type
Middle East and North Africa
Algeria DB
Bahrain DB
Djibouti DB
Egypt, Arab Rep. of DB
Iran, Islamic Rep. of DB
Jordan DB
Libya DB
Morocco DB
Tunisia DB
Yemen, Rep. of DB
Note: n. acs. = notional accounts. The Slovak Republic has also introduced mandatory defined-contribution
pensions (from January 2005).
benefits available to the whole population. These cases are also shown in the "targeted"
column of table 2.1.
Virtually all of the OECD countries have some targeted pension scheme or social-
assistance program. Most of the Latin American and Caribbean systems have a publicly
provided minimum pension to support those with small entitlements to mandatory
private pensions. However, less than half of the 10 countries of Eastern Europe and
Central Asia have minimum pensions. Indeed, Croatia, Hungary, and the Slovak Republic
have abolished or plan to abolish their targeted pensions as part of their fundamental
pension reforms.
Minimum
Minimum pensions are similar to targeted plans since they also aim to prevent pensions
from falling below a certain level. However the institutional set-up and the eligibility con-
ditions are different. Minimum pensions are defined as schemes that are governed by the
rules of the second-tier, earnings-related pension provision. (This means that the schemes
called minimum pensions in Latin America and the Caribbean, for example, are here
classified as targeted programs since they are institutionally separate from second-tier
provision.) Usually, retirees must have paid contributions for a minimum number of years
in order to receive benefits.
Minimum credits in earnings-related schemes, such as those in Belgium and the United
Kingdom, have a similar effect: benefits for workers with very low earnings are calculated
as if the worker had earned at a higher level.
Overall, eight high-income OECD countries have a minimum pension or minimum
credits in their earnings-related schemes. They are also very common in Eastern Europe
and Central Asia (7 out of 10 countries) and in the Middle East and North Africa (all except
the Republic of Yemen).
Approximately half of the OECD countries and those of Eastern Europe and Central
Asia rely on one primary instrument to prevent old-age poverty. The other half employ a
combination of two or three schemes. In the other two regional groupings of countries, all
have only one redistributive program.
8 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Second-Tier, Mandatory Insurance
The second tier in this typology of pension schemes plays an insurance role. It aims to
ensure that retired people have an adequate replacement rate (retirement income relative
to earnings before retirement) and not just a poverty-preventing absolute standard of
living. Like the first tier, it is mandatory. Only Ireland and New Zealand of the 53 countries
in this study do not have some form of mandatory, second-tier provision.
Defined Benefit
Of the 53 countries, 32 have public, defined-benefit (DB) plans, making that by far the
most common form of pension-insurance provision.
In DB schemes, the amount a pensioner receives depends on the number of years of
contributions and on some measure of individual earnings throughout the working life.
DB schemes are the only kind of insurance pension found in the Middle East and
North Africa. These schemes are rare in Latin America and the Caribbean: only Costa
Rica and Uruguay have a DB scheme for new workers. Half of Eastern Europe and
Central Asia and more than half of the high-income OECD countries have public DB
programs.
Defined Contribution
The second most common form of pension-insurance provision is the defined-contribution
(DC) plan. Nineteen out of the 53 countries have DC plans.
In these schemes, each worker has an individual account in which contributions are saved
and invested, and the accumulated capital is usually converted into a pension-income
stream at retirement; lump-sum withdrawals are rarely permitted. Typically, the capital has
to be used to buy an annuity (a guaranteed pension payment until death), which meets
certain conditions (such as indexation of benefits and provision of survivors' benefits).
Although only three high-income OECD countries have mandatory DC schemes, they
are very common in Latin America and the Caribbean (all nine countries) and in Eastern
Europe and Central Asia (seven out of ten countries).
Points
Finally, some countries have earnings-related schemes that do not follow the traditional DB
model. First, there are six points systems: the French occupational plans and the Croatian,
Estonian, German, Norwegian, and Slovak public pension schemes.
Workers earn pension points based on their individual earnings for each year of contri-
bution. At retirement, the sum of pension points is multiplied by a pension-point value to
convert them into a regular pension payment.
Notional Accounts
Four countries also have notional-accounts schemes: the public plans of Italy, Latvia,
Poland, and Sweden.
These are schemes that record each worker's contributions in an individual account and
apply a rate of return to the accounts. The accounts are notional in that both the incoming
contributions and the interest charged to them exist only on the books of the managing
institution. At retirement, the accumulated notional capital in each account is converted
into a stream of pension payments using a formula based on life expectancy at the time
of retirement.
TYPOLOGY 9
Defined Credits
Mandatory contributions to Swiss occupational plans look at first like a DC scheme, since
individuals and their employers must pay a contribution rate that varies with age.
However, the government sets the minimum rate of return that the scheme must pay and
a mandatory annuity rate at which the accumulation is converted into a flow of pension
payments. Hence, the system has more elements of a DB than a DC plan.
Notes
1. Voluntary provision, individual or employer-provided, comprises a third tier. However,
the focus of this report is on mandatory pensions alone.
3. Parameters
THE MAIN FEATURES OF 53 COUNTRIES' pension systems are summarized in tables 3.1
through 3.4. This follows the typology of the previous section (table 2.1), dividing the
pension system into two tiers. The summary necessarily leaves out much of the institu-
tional details. Complete descriptions are provided in country chapters in Part II of the
report.
First-Tier, Redistributive Schemes
The level of benefits under first-tier, redistributive schemes is expressed as a percentage of
average earnings in each country.
In the cases of minimum pensions and basic pension schemes, the benefit entitlement is
shown for workers who enter the workforce at age 20 and work without interruption until
they reach the standard pension eligibility age. The social-assistance level is shown under
the targeted category only when there is no specific, targeted scheme for poor pensioners.
(Only full-career workers with very low earnings will be eligible for the targeted and
social-assistance programs; the majority of beneficiaries will be those with short and inter-
rupted contribution histories.) The final row shows the total first-tier benefit to which a
full-career worker would be entitled. This is relevant because, in some cases, workers can
receive several different types of first-tier benefits at the same time, while in others, they
are only eligible for one of the different programs.
The average minimum retirement benefit across the 24 high-income OECD countries
is 31 percent of average earnings. The basic pension in Japan and targeted schemes in
Finland and the United States are on the low side, providing benefits worth approximately
one-fifth of average earnings. At the other end of the spectrum, Luxembourg and Portugal
have a minimum pension well above 40 percent of average earnings.
The overall minimum retirement income is generally much lower in Eastern Europe
and Central Asia than in the high-income OECD countries, averaging approximately 20
percent of average earnings. Only Latvia and Turkey have benefits close to the average of
the high-income OECD countries.
The average minimum retirement benefits in Latin America and the Caribbean and in
the Middle East and North Africa lie between the averages of the other two groups of
countries at approximately 28 percent. However, the range of benefit levels is more
diverse. For example, the Islamic Republic of Iran has a minimum of two-thirds of average
earnings and Colombia, one-half. The Republic of Yemen has no minimum pension, and
the Arab Republic of Egypt pays just 7 percent of average earnings.
Second-Tier, Earnings-Related Schemes
The second-tier insurance schemes offer several types of earnings-related plans: defined
benefit, points, or notional accounts. The main parameter that accounts for differences in
the value of these schemes is the accrual rate per year of contribution--that is, the rate at
11
12 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
which a worker earns benefit entitlements for each year of coverage. The accrual rate is
expressed as a percentage of the earnings that are covered by the pension scheme. Most
pension schemes cover only part of workers' earnings up to a ceiling to calculate pension
benefits. The rationale behind such ceilings is the view that higher-income workers can
save individually if they want to reach a higher replacement rate.
Only three of the high-income OECD countries (Australia, Ireland, and New Zealand)
do not have an earnings-related, second-tier scheme. Most of the Latin American and
Caribbean countries have abolished their earnings-related plans as part of a fundamental
pension reform that introduced mandatory DC schemes for new workers. Only two retain
an earnings-related scheme. In Eastern Europe and Central Asia, the seven countries that
introduced mandatory DC have retained a public, earnings-related element in the pension
package, even for new workers.
Most countries have traditional defined-benefit schemes for which accrual rates may
be calculated in a straightforward way. For alternative types of earnings-related schemes--
points systems and notional accounts--it is also possible to calculate an effective
accrual rate.
For points systems, such as the German public plan, French occupational schemes, and
the new Slovak public pension, the effective accrual rate (shown in tables 3.1 through 3.4)
is the ratio of the cost of a pension point to the pension-point value, expressed as a
percentage of individual earnings. This ratio, like the accrual rate in DB schemes, gives
the benefit earned each year as a proportion of earnings in that year. The details of this
calculation are set out below.
In the notional-accounts schemes, the effective accrual rate is calculated in a similar
way. Again, this ratio gives the annual pension entitlement as a proportion of earnings in a
given year.
In fewer than half of the countries with earnings-related plans (of all three types), the
accrual rates are linear: that is, a single percentage rate applies across the range of covered
earnings and to each year of coverage. In the other countries, the pension benefit earned
for each year of coverage varies, with individual earnings, with the number of years of
contributions, or with individual age. Tables 3.1 through 3.4 show a typical accrual rate in
these cases; the details are provided in the country chapters.
In eight cases, the accrual rate varies with earnings (indicated in the tables by [w]). In the
public schemes of the Czech Republic, Norway, Portugal, Switzerland, and the United
States, the pattern is progressive, giving higher replacement rates to lower-income
workers. In the United Kingdom, the accrual rates are U-shaped, highest for low earners,
then smaller, then higher again. In the occupational plans of France and Sweden,
the accrual rates are designed to offset the redistribution in the public scheme; they pay a
higher replacement rate to high earners on pay above the ceiling of the public plan. In the
occupational plans of Finland and Switzerland, pension accrual increases with age ([a] in
table 3.1).
Nine countries have accrual rates that vary with length of service ([y]). In Luxem-
bourg, the accrual rate increases for people with a longer contribution history. In the
other eight countries (Costa Rica, Egypt, Libya, Morocco, Spain, Tunisia, Turkey, and
Uruguay), the pattern is the reverse of that in Luxembourg. The highest accrual rate is
for the first few years of coverage and the lowest for later years in longer contribution
histories.
Accrual rates tend to be highest in Middle East and North Africa, averaging nearly 2.4
percent. The two countries from Latin America and the Caribbean that retain a DB scheme
have accrual rates just below 2.0 percent. In the high-income OECD countries, the average is
just under 1.5 percent, while in Eastern Europe and Central Asia, it is just over 0.8 percent.
PARAMETERS 13
Defined-Contribution Schemes
The largest DC programs are found in Latin America and the Caribbean. Chile, Colombia, El
Salvador, and Peru all require contributions of more than 10 percent of earnings (including
administrative charges and disability insurance). In Mexico, the contribution is 6.5 percent
of earnings with the government paying 5.5 percent of the minimum wage into all
accounts. For an average earner, the total contribution comes to 7.1 percent of earnings.
Contribution rates tend to be lower in the DC systems of Eastern Europe, averaging 6.25
percent compared with 9.50 percent in the countries of Latin America and the Caribbean.
This is no surprise since all the Eastern European countries with DC programs have
retained a sizable public, earnings-related pension, which is a rare policy in Latin American
and Caribbean countries.
Ceilings on Pensionable Earnings
Most high-income OECD countries do not require high earners to contribute to the pen-
sion system on their entire earnings. Usually, a limit is set on the earnings used to calculate
both contribution liability and pension benefits. This ceiling on the earnings covered by
the pension system has an important effect on the structure, size, and cost of the second-
tier systems. High ceilings or the absence of a ceiling means that high-income workers
receive a high replacement rate, and there is little need for voluntary private pensions.
In the other three groups of countries, ceilings are either absent or set at a very high level
relative to average earnings. The exceptions are Hungary, Poland, and Turkey in Eastern
Europe and Central Asia; El Salvador (mandatory DC scheme) and Uruguay (public DB
scheme) in Latin America and the Caribbean; and Egypt and Morocco in the Middle East
and North Africa.
The ceiling on public pensions averaged across 16 high-income OECD countries is 190
percent of average economywide earnings. At roughly the level of average economy-
wide earnings, the Canadian ceiling is exceptionally low. Belgium, France, Switzerland,
and Sweden also have relatively low ceilings, at 116 to 132 percent of average earnings.
In these countries, approximately 15 to 20 percent of workers earn above the ceiling of
the public scheme.
Tables 3.1 through 3.4 also show ceilings for mandatory DC pensions and for mandatory
occupational plans (in France, Sweden, and Switzerland, for example). Including these pro-
grams, the overall ceiling for 17 high-income OECD countries averages 275 percent of
average earnings.
Pension Eligibility Ages
Table 3.1 shows that the majority of high-income OECD countries have a standard retire-
ment age of 65 for men. Iceland, Norway, and the United States stand out as having a stan-
dard pension age of 67. At the other extreme, France is the only high-income country to
allow normal retirement at age 60.
Pension ages are generally lower in the other three groups of countries. In Eastern
Europe and Central Asia, they are usually somewhere between 60 and 65, with an average
of 62.75.
In Latin America and the Caribbean and the Middle East and North Africa, the rules
regarding retirement are more complex. The DC pensions of Latin America can typically
be drawn at any age provided the pension reaches a minimum absolute value (or some-
times a minimum replacement rate). The pension ages shown, therefore, tend to be those
14 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 3.1. Summary of Pension System Parameters, High-Income OECD Countries
Australia Austria Belgium Canada Denmark Finland France Germany Greece Iceland Ireland Italy
First tier
(% average
earnings)
Targeted 23 37 23 16 17 21 31 24 12 25h 28 22
Basic n.a. n.a. n.a. 14 17 n.a. n.a. n.a. n.a. n.a. 31 n.a.
Minimum n.a. n.a. 38a n.a. n.a. n.a. 29 n.a. 40 n.a. n.a. n.a.
Overall
entitlement 23 37 38 30 34 21 31 24 40 25 31 22
(full-career
worker)
Second tier
Earnings-
related
Type None DB DB DB DB/DC DB DB/points Points DB DB None n. acs.
Accrual rate n.a. 1.78 1.50 0.63 n.a. 1.50 [a]d 1.75 [w]e,f 1.00 2.57e 1.40 n.a. 1.75
(% indiv.
earnings)
Defined
contribution
Contribution
rate 9 n.a. n.a. n.a. 1 n.a. n.a. n.a. n.a. n.a. n.a. n.a.
(% indiv.
earnings)
Ceilings
(% average
earnings)
Public n.a. 164 129 100 n.a. n.a. 128 164 325g n.a. n.a. 357
Private/
occupational 234 n.a. n.a. n.a. n.a. None 385 n.a. n.a. None n.a. n.a.
Pension age
Normal 65 65 65 65 65 65 60 65 65 67 65 65
(women) 65 60 65 65 65 65 60 65 65 67 65 65
Early 55 n.a. 60 60 n.a. 60 n.a. 63 57 n.a. n.a. 57
(women) 55 n.a. 60 60 n.a. 60 n.a. 63 57 n.a. n.a. 57
Sources: OECD, national officials, 2002.
Note: n.a. = not applicable. n. acs.= notional accounts. [w] = varies with earnings; [y] = varies with years of service; [a] = varies
with age.
Parameters and rules of 2002 plus any long-term changes that have already been legislated. See "Modeling" section for more
details.
a. Belgium and the United Kingdom: minimum benefit calculated from minimum credit.
b. Portugal and the United States: higher accrual rates for lower earnings, lower accruals on higher earnings.
d. Finland: higher accrual rates at older ages.
e. France, Greece, and Sweden: data shown combine two different programs.
f. France and Sweden: higher accrual rate on higher earnings.
g. Greece and Luxembourg: effective ceiling calculated from maximum pension.
h. Iceland: includes three different programs.
i. Luxembourg: accrual rate is higher for longer contribution periods.
k. The Netherlands: accrual rate varies between occupational schemes.
l. Norway: lower accrual rate on higher earnings.
m. Spain: higher accrual rate on earlier years of service and lower on later years.
(continued on the next page)
PARAMETERS 15
Table 3.1. (continued)
Korea, Luxem- New United United
Japan Rep. of bourg Netherlands Zealand Norway Portugal Spain Sweden Switzerland Kingdom States
First tier
(% average
earnings)
Targeted n.a. n.a. 36 34 n.a. 33 20 n.a. 34 26 26 20
Basic 19 30 12 34 38 18 n.a. n.a. n.a. n.a. 20 n.a.
Minimum n.a. n.a. 46 n.a. n.a. n.a. 44 33 n.a. 19 13a n.a.
Overall
entitlement 19 30 46 34 38 33 44 33 34 26 33 20
(full-career
worker)
Second tier
Earnings-
related
Type DB DB DB DB None Points DB DB n. acs. DB DB DB
Accrual rate 0.71 0.75 1.85 1.75k n.a. 1.05 2.25 3.00 1.21 1.70 0.89 0.91
(% indiv. [y]i [w]l [w]b [y]m [w]e,f [w/a] [w] [w]b
earnings)
Defined
contribution
Contribution
rate n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 4.5e n.a. n.a. n.a.
(% indiv.
earnings)
Ceilings
(% average
earnings)
Public 175 189 240g n.a. n.a. 219 None 189 132 116 156 262
Private/
occupational n.a. n.a. n.a. None n.a. n.a. n.a. n.a. 367 116 n.a. n.a.
Pension age
Normal 65 60 65 65 65 67 65 65 65 65 65 67
(women) 65 60 65 65 65 67 65 65 65 64 65 67
Early 60 55 57 60 n.a. n.a. 55 60 61 63 n.a. 62
(women) 60 55 57 60 n.a. n.a. 55 60 61 62 n.a. 62
at which people are eligible for the public pension benefit (usually, the minimum pension).
Three countries pay these pensions from age 65. The rest have lower eligibility ages: the
average for this group is just under 62.5.
In the DB systems of the countries in the Middle East and North Africa, retirement is
possible at very early ages provided a minimum number of years of contributions have
been made. In Egypt and the Islamic Republic of Iran, the pension can be drawn at any
age subject to 20 and 30 years' contributions, respectively. Although the normal pension
age is typically 60 (except in Djibouti and Libya), early retirement for a full-career
worker is possible at an average age of 50 (in the nine countries with early retirement
provisions).
Early retirement provisions are less common in the high-income OECD countries than
in the other three groups. Retirement is possible before the normal pension age in 16 out of
24 cases.
16 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 3.2. Summary of Pension System Parameters, Eastern Europe and Central Asia
Czech Slovak
Bulgaria Crotia Republic Estonia Hungary Latvia Lithuania Poland Republic Turkey
First tier
(% average earnings)
Targeted 14 n.a. 10 14 n.a. n.a. n.a. 24 n.a. 6
Basic n.a. 11 8 7 n.a. n.a. 17 n.a. n.a. n.a.
Minimum 16 n.a. 12 n.a. 22 33 n.a. n.a. 22 28
Overall entitlement 16 11 12 14 22 33 17 24 22 28
(full-career worker)
Second tier
Earnings-related
Type DB Points DB Points DB n. acs. DB n. acs. Points DB
Accrual rate 1.00 0.25 0.45 [w]a 0.50 1.22 0.60 0.50 0.67 1.19 2.00 [y]c
(% indiv. Earnings)
Defined contribution
Contribution rate 2.0 5.0 n.a. 6.0 8.0 10.0 5.5 7.3 n.a. n.a.
(% indiv. Earnings)
Ceilings
(% average earnings)
Public 370 None None 1,000 220 700 500 245 300 173
Private/occupational 370 None n.a. 1,000 220 700 500 n.a. n.a. n.a.
Pension age
Normal 63 65 63 63 62 62 62.5 65 62 60
(women) 60 60 59�63b 63 62 62 60 60 62 58
Early n.a. 60 60 60 n.a. n.a. n.a. n.a. n.a. n.a.
(women) n.a. 55 56�60c 60 n.a. n.a. n.a. n.a. n.a. n.a.
Sources: OECD, World Bank, national officials, 2002.
Note: Pension ages for women are shown only where they are different from men's. Early pension ages are only shown where
relevant. n.a. = not applicable. n. acs.= notional accounts. [w] = varies with earnings; [y] = varies with years of service;
[a] = varies with age.
Parameters and rules of 2002 plus any long-term changes that have already been legislated. See "Modeling" section for more details.
a. The Czech Republic: higher accrual rates for lower earnings, lower accruals on higher earnings.
b. The Czech Republic: pension ages for women vary with the number of children they have.
c. Turkey: higher accrual rate on earlier years of service and lower on later years.
Pension eligibility ages for women are lower than for men in many countries: 6 of the
10 countries of Eastern Europe and Central Asia, 5 of the 9 countries of Latin America and
the Caribbean, and 7 of the 10 from Middle East and North Africa. In the high-income
OECD countries, in contrast, nearly all countries have already equalized men and
women's pension ages or are gradually doing so (for example, Belgium and the United
Kingdom).
Defining Earnings
Earnings-related pension schemes must define and measure individuals' earnings to cal-
culate their pension benefits. There are two ways in which policy may differ between
countries: the period over which earnings are measured and the way earnings are adjusted
to reflect changes in living standards between the time pension rights accrued and the
time they are claimed (table 3.5). These variables have a powerful influence on the level of
benefits.
PARAMETERS 17
Table 3.3. Summary of Pension System Parameters, Latin America and the Caribbean
Dominican
Argentina Chile Colombia Costa Rica Republic El Salvador Mexico Peru Uruguay
First tier
(% average earnings)
Targeted n.a. 20�25 50 10 40 32 19 25 20
Basic 28 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Minimum n.a. n.a. n.a. 20 n.a. n.a. n.a. n.a. n.a.
Overall entitlement 28 20�25 50 20 40 32 19 25 20
(full-career worker)
Second tier
Earnings-related
Type None None None DB None None None None DB
Accrual rate n.a. n.a. n.a. 1.95 [y]b n.a. n.a. n.a. n.a. 1.97 [y]b
(% indiv. earnings)
Defined contribution
Contribution rate 6.00 12.30c 15.00c 4.25 8.00 13.00c 6.50a 11.50c 7.50�15.00d
(% indiv. earnings)
Ceilings
(% average earnings)
Public n.a. n.a. n.a. None n.a. n.a. n.a. n.a. 130
Private/occupational 580 311 1,000 None 1,050 165 482 None 570
Pension age
Normal 65 n.a. 62 62 60 60 65 65 60
(women) 60 n.a. 60 60 n.a. 55 60 n.a. n.a.
Early n.a. n.a. n.a. n.a. 55 n.a. n.a. n.a. n.a.
(women) n.a. n.a. n.a. n.a. 55 n.a. n.a. n.a. n.a.
Sources: OECD, World Bank, national officials, 2002.
Note: Pension ages for women are shown only where they are different from men's. Early pension ages are only shown where
relevant. n.a. = not applicable. [w] = varies with earnings; [y] = varies with years of service; [a] = varies with age.
Parameters and rules of 2002 plus any long-term changes that have already been legislated. See "Modeling" section for more details.
a. Mexico: additional contribution of 5.5 percent of minimum wage.
b. Costa Rica and Uruguay: higher accrual rate on earlier years of service and lower on later years.
c. Includes administrative expenses, insurance coverage, and so on. These are 2.3 percent for Chile, 3 percent for Colombia, 3
percent for El Salvador; and 3.5 percent for Peru. Other countries' contributions are shown gross of these expenses.
d. Uruguay: contribution rate varies with earnings.
Entitlements to earnings-related pensions are calculated in relation to the past earnings
of the individual worker. However, the way these are measured differs among countries.
The measure might be, for example, a period of final earnings, the lifetime average, or a
number of best years of earnings. When individual earnings increase over a worker's
career, as is often the case, using only final or a few last years of earnings will result in a
higher benefit than when taking into account early years of the career when earnings were
much lower. Using short periods to measure earnings in pension benefit formulae was
once very common internationally, but most countries have now extended the period of
time over which earnings are measured.
The reasons earnings-related pension systems in the past tended to base benefits on a
limited number of years are two: first, using final or best salary was a way of offsetting the
effects of inflation on earlier years' pay; second, shorter periods of earnings were easier to
measure exactly and so reduced administrative costs. Record keeping has improved
through the use of information technology, allowing files covering longer periods to be
18 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 3.4. Summary of Pension System Parameters, Middle East and North Africa
Egypt, Iran,
Arab Islamic Yemen,
Algeria Bahrain Djibouti Rep. of Rep. of Jordan Libya Morocco Tunisia Rep. of
First tier
(% average earnings)
Targeted n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Basic n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Minimum 33 42 21 7 67 35 25 18 29 n.a.
Overall entitlement 33 42 21 7 67 35 25 18 29 0
(full-career worker)
Second tier
Earnings-related
Type DB DB DB DB DB DB DB DB DB DB
Accrual rate 2.50 2.20 1.50 2.20 [y]b 3.30 2.50 2.30 [y]a 2.00 [y]a 2.67 [y]a 2.50
(% indiv. earnings)
Defined contribution
Contribution rate n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
(% indiv. earnings)
Ceilings
(% average earnings)
Public 815 None None 176 800 None None 218 322 None
Private/occupational n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Pension age
Normal 60 60 55 60 60 60 65 60 60 60
(women) 55 55 55 60 55 55 60 60 60 55
Early 50 45 n.a. Yesc Yesc 45 62 55 50 50
(women) 45 45 n.a. Yesc Yesc 45 No 55 50 46
Sources: World Bank, national officials, 2002.
Note: Pension ages for women are shown only where they are different from men's. Early pension ages are only shown where
relevant. n.a. = not applicable. [w] = varies with earnings; [y] = varies with years of service; [a] = varies with age.
Parameters and rules of 2002 plus any long-term changes that have already been legislated. See "Modeling" section for more details.
a. Libya, Morocco, and Tunisia: higher accrual rate on earlier years of service and lower on later years.
b. Egypt: accrual rate for both basic and variable wage schemes. However, earnings measure and valorization differ. (See
"Defining Earnings.")
c. Egypt, the Islamic Republic of Iran: early retirement at any age with 20 and 30 years' contributions, respectively.
maintained rather than relying on a few years' final salary. Also, computerization allows
valorization of earlier years' earnings (see below) to be calculated easily. This means that
pension formulae based on final salary are no longer needed as a way of protecting against
inflation. Furthermore, the problems of using short periods to measure earnings in
pension formulae have become apparent, including high costs, strategic manipulation of
earnings profiles, and disproportionately higher benefits going to higher-income workers
because they tend to have more steeply rising age-earnings profiles.
Earnings Measures
Of the 20 high-income OECD countries with earnings-related schemes, 17 currently use or
will use lifetime average, or very close to lifetime average, pay in the benefit formula.
The exceptions are the public schemes of France, Greece, and Spain, and the Norwegian
points-based scheme and Swedish occupational pensions. Some countries--Austria,
Finland and Portugal--are currently phasing in longer averaging periods for earnings in
their benefit calculation.
PARAMETERS 19
Table 3.5. Earnings Measure and Valorization: Earnings-Related Schemes
Earnings measure Valorization
High-income OECD countries
Australia n.a. n.a.
Austria Best 15 years, moving to Yes, to be decided (earnings
40 years probable)
Belgium Lifetime average Prices
Canada Lifetime average, excluding Average earnings
15% of worst years
Denmark n.a. n.a.
Finland Final 10 years, moving to 50% of prices and 50% of average
lifetime average earnings, moving to 80% of prices
and 20% of average earnings
France Best 20 years, moving to Prices (public)
25 years (public)
Lifetime average Prices (occupational)
(occupational points)
Germany Lifetime average (points) Average earnings; adjustment for
changes in contributions and poten-
tial contribution to voluntary
pensions
Greece Final 5 years Pension increases of public sector
workers
Iceland Lifetime average (occupational) Fixed rate
Ireland n.a. n.a.
Italy Lifetime average (notional Moving to an average of GDP
accounts) growth over 5 years
Japan Lifetime average Average earnings
Korea, Rep. of Lifetime average Average earnings
Luxembourg Lifetime average Average earnings
Netherlands Lifetime average for approx. Average earnings (occupational)
two-thirds, and final for one-third
of schemes (occupational)
New Zealand n.a. n.a.
Norway Best 20 years (points) Average earnings
Portugal Best 10 out of final 15 years, 75% prices and 25% average
moving to lifetime average earnings with maximum real growth
of 0.5%
Spain Final 15 years Prices up to 2 years before
retirement
Sweden Lifetime average (notional accounts) Average earnings with adjustment
Final (occupational scheme) for demographics (notional
accounts)
Switzerland Lifetime average (public scheme) Average earnings
Lifetime average (occupational) Minimum interest rate specified
United Kingdom Lifetime average Average earnings
United States Best 35 years Average earnings up to age 60;
prices from age 62 to 67
(continued on the next page)
20 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 3.5. (continued)
Earnings measure Valorization
Eastern Europe and Central Asia
Bulgaria n.a. n.a.
Croatia 10 consecutive best years, moving 50% of prices and 50% of average
to lifetime average earnings
Czech Republic Since 1985, moving to 30 years Average earnings
Estonia Lifetime average (points) 50% of prices and 50% of average
earnings
Hungary Since 1988, moving to lifetime Average earnings
average
Latvia Lifetime average (notional accounts) Covered wage bill
Lithuania Lifetime average Average earnings
Poland Lifetime average (notional Prices + 75% of real wage-bill
accounts) growth; policy changes to real
wage-bill growth but at least price
inflation from 2004
Slovak Republic Lifetime average (points) Average earnings
Turkey Lifetime average GDP growth
Latin America and the Caribbean
Argentina n.a. n.a.
Chile n.a. n.a.
Colombia n.a. n.a.
Costa Rica Best 48 of final 60 months None
Dominican Republic n.a. n.a.
El Salvador n.a. n.a.
Mexico n.a. n.a.
Peru n.a. n.a.
Uruguay Final 10 years Average earnings
Middle East and North Africa
Algeria Final 5 years None
Bahrain Final 2 years None
Djibouti Final 10 years Yes, to be decided
Egypt, Arab Rep. of Final 2 years (basic wage scheme) None
Lifetime average (variable 2% pension increase per year
wage scheme) of service
Iran, Islamic Rep. of Final 2 years None
Jordan Final 2 years None
Libya Final 3 years None
Morocco Higher of final 3 or final 5 years None
Tunisia Final 10 years Prices
Yemen, Rep. of Final 2 years None
Sources: OECD, World Bank, national officials, 2002.
Note: n.a. = not applicable (country does not have an earnings-related scheme).
Lifetime average earnings measures also predominate in Eastern Europe and Central Asia.
However, in the Middle East and North Africa, final salary schemes are almost universal.
Valorization
Valorization is the adjustment of past earnings to account for changes in living standards
between the time pension rights are earned and the time they are claimed. In final salary
PARAMETERS 21
schemes, there is obviously no need for valorization. However, it is universal practice in
schemes where benefits are based on earnings measured over a longer period.
Until very recently, valorization has received much less attention than the related policy
of indexation of pensions in payment despite the powerful impact valorization exerts on
pension benefits.
Adjustments related to valorization exist also in the different variants of earnings-
related schemes. In notional accounts, the exact corollary to valorization is the notional
interest rate applied, which again adjusts benefits between the time they were earned and
the time they are drawn. Similarly, procedures for uprating the value of a pension point in
points systems have the same effect (OECD 2005, annex I.1).
Table 3.5 shows valorization rules--and the equivalent policies for notional accounts
and points systems--in the final column.
Of the 20 high-income OECD countries with earnings-related schemes, 11 valorize in
line with growth of earnings (or close, as in the United States). The same applies in four of
the Eastern European and Central Asian countries. Valorization is purely with prices in
Belgium, France (both the public scheme and occupational plans), Iceland, Korea and Spain.
Croatia, Estonia, Finland, Poland, and Portugal valorize with a mix of earnings and
prices. In Italy and Turkey, adjustments are linked to a measure of gross domestic product
(GDP) growth, and in Latvia, to the covered wage bill.
The effect of valorization policy on pension entitlements can be very large. This is
due to a compound-interest effect. On the baseline economic assumptions--real wage
growth of 2.0 percent and price inflation of 2.5 percent--price valorization for a full
career (between ages 20 and 65) results in a pension that would be 40 percent lower
than a policy of full adjustment of earlier years' pay in line with economywide average
earnings.
Indexation
Pensions in payment are often adjusted during retirement to reflect changes in costs or
standards of living over time. The aim is to protect older people from inflation. The
adjustment of pension scheme parameters also has a powerful impact on the value of
entitlements.
Few countries had formal indexation rules when pension schemes were established.
However, the high-inflation era of the 1970s led many governments to adopt automatic
procedures for adjusting pensions in payment (Weaver 1998).
Many countries moved from earnings to price indexation during the 1980s and 1990s as
a cost-cutting measure (since wages tend to grow faster than prices). With price indexa-
tion, the purchasing power of pensions is preserved. However, the standard of living of
individual retirees over time falls behind that of workers.
Indexing Pensions in Payment
Table 3.6 shows that most high-income OECD countries adjust earnings-related pensions
in line with prices.
There are some exceptions. Luxembourg links pensions in payment to earnings
growth; Germany, to earnings growth with an adjustment for changes in pension
contributions.
In Eastern Europe and Central Asia, just the Czech Republic and Turkey index to prices.
Six of these countries have some form of mixed indexation, with pension increases linked
partly to prices and partly to earnings growth. Mixed indexation also applies in Finland
and in Switzerland (which pioneered the policy).
22 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 3.6. Procedures for Adjustment of Pensions in Payment: Earnings-Related
Schemes
Country Scheme Prices Wages Notes
High-income OECD countries % %
Austria n.a. n.a. Discretionary; prices assumed in
modeling
Belgium 100 Price index excludes alcohol, cigarettes,
and fuel; increases only if inflation
exceeds 2%
Canada 100
Finland Occupational 80 20
France Earnings-related 100
Occupational 100 No automatic procedure but recent
practice
Germany 100 Wages net of pension contributions
Greece n.a. n.a. Discretionary
Iceland Occupational 100 Minimum legal uprating
Italy 75�100 Increase between full and 75% price
indexation depending on pension level
Japan 100
Korea, Rep. of 100
Luxembourg 100 Increase if inflation exceeds 2.5%;
additional adjustment to wages
Netherlands Occupational 100 No legal requirement but customary
Norway 100 No legal requirement but recent
practice
Portugal 100
Spain 100
Sweden Earnings-related n.a. n.a. Gross earnings less growth norm of
1.6%
Occupational 100
Switzerland Earnings-related 50 50
Occupational n.a. n.a. Discretionary
United Kingdom 100
United States 100
Eastern Europe and Central Asia
Bulgaria n.a. n.a.
Croatia 50 50
Czech Republic 100 Adjustment to prices plus increases of at
least one-third of real wage growth
Estonia 50 50
Hungary 50 50
Latvia 50 50 Prices plus 25% of real wage bill,
moving to 50% from 2011
Lithuania n.a. n.a. Discretionary
Poland 80 20 Proposal to shift to pure price indexation
Slovak Republic 50 50
Turkey 100
(continued on the next page)
PARAMETERS 23
Table 3.6. (continued)
Country Scheme Prices Wages Notes
Latin America and the Caribbean % %
Costa Rica 100
Uruguay 100 To civil-service wage index
Middle East and North Africa
Algeria n.a. n.a. Discretionary; annual review
Bahrain n.a. n.a. Ad hoc
Djibouti n.a. n.a. Discretionary
Egypt, Arab Rep. of Basic wage n.a. n.a. Annual increases; recently 10%
Variable wage n.a. n.a. No adjustment
Iran, Islamic Rep. of n.a. n.a. Discretionary
Jordan n.a. n.a. Discretionary
Libya n.a. n.a. Ad hoc
Morocco n.a. n.a. Ad hoc
Tunisia 100 Minimum wage
Yemen, Rep. of n.a. n.a. Ad hoc
Sources: OECD, World Bank, national officials, 2002.
Italy and Greece have policies of progressive indexation, which gives smaller increases on
larger pensions and larger increases on smaller pensions.
In practice, pension-benefit increases in the high-income OECD countries have often
strayed from the index set out in the rules (see Vordring and Goudswaard 1997).
Indexation of pensions in payment is almost entirely absent in Middle East and North
Africa. There are just two exceptions. Egypt pays a flat increase on basic wage pensions
that has recently been just 10 percent a year (while inflation has been both higher and
lower than this level). Tunisia links pensions in payment to the minimum wage.
Elsewhere in Middle East and North Africa, benefit adjustments are discretionary (there
has to be an annual review, but there is no fixed procedure for determining the increase)
or ad hoc (there is no requirement for periodic review of benefits, but there have been
sporadic increases in recent years).
Defined-Contribution Plans
In Latin America and the Caribbean, most countries allow workers a choice of ways of
withdrawing their pension benefits. Typically, these include life annuities (an insurance
company guarantees the payment) or phased withdrawals (a defined portion of the
account balance may be taken out each year).
In the first case, the risk of longevity is borne by the insurer, which makes the pay-
ment as long as the individual survives. In the second case, the individual bears the
longevity risk since a long life means that the accumulated balance will be very small at
advanced ages.
In Eastern Europe and Central Asia, in contrast, most countries require benefits to be
withdrawn as an indexed annuity, typically linked to prices.
Australia offers the broadest range of withdrawal options. Individuals may choose
from a range of income streams (including annuities with different upratings) or make
lump-sum withdrawals. Currently, most benefits are taken as lump sums.
24 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Indexing Pension-System Parameters
Indexation policy affects the value of pension benefits other than the earnings-related
schemes (table 3.6).
Governments also adjust targeted and basic pension benefits, usually on an annual
basis. This policy has much more significance for the value of pension entitlements than
does the indexation of pensions in payment.
Take the United Kingdom's basic pension scheme as an example. This has been linked
to prices since 1981, when it was worth 23.7 percent of average earnings. Today it is worth
just 15.8 percent of average earnings. The change in indexation procedure reduced not
only the entitlements of pensioners but also the benefits of all future workers. If the proce-
dure continues, then the basic pension for new entrants will be worth just 6.4 percent of
average earnings when they retire in 45 years' time, just 40 percent of its value relative
to earnings now. (This calculation uses the baseline real-earnings-growth assumption of
2 percent per year.)
Canada also links its basic pension to prices. Canada and Sweden link their targeted
schemes to prices (while the United Kingdom now links this to average earnings). The
implication, over the long periods involved in pension policy, is that these programs will
become obsolete. For new entrants, the minimum retirement income in 45 years' time
would be just 12 percent of average earnings in Canada and 14 percent in Sweden. It is
difficult to believe that it will be politically possible to pay such low incomes to poor, old
people. As a result, these policies are unlikely to be sustainable or, indeed, sustained.
A similar argument applies to other parameters of the pension system. Canada links
the ceiling of its earnings-related pension scheme to prices. The ceiling is already at
approximately the average earnings. In 45 years' time, it would be just 40 percent of average
earnings. Most pensioners would then be getting the same benefit. Again, it is unlikely
that the scheme will be transformed to such a degree.
The modeling implicitly assumes that these benefits and parameters are linked to average
earnings (see below).
Taxes and Contributions
Pensioners often do not pay social security contributions. Income taxes are progressive:
taxes on lower pension incomes are less than those paid on (higher) work earnings. Most
income taxes give preferential treatment to pension incomes or to pensioners. Replace-
ment rates (pensions relative to earnings) are higher net of taxes and contributions than
gross. Relevant features of income taxes and social security contributions are shown in
three categories in the country studies in Part II of this report.
First, there are age-based tax allowances and tax credits, which exceed those available
to taxpayers of working age. In many cases, these concessions are targeted at those with
modest incomes and are withdrawn as income increases.
Second, there are reliefs for some or all of pension income received. Several countries
fully or partially exempt pensions paid from public sources from the personal income tax.
Moreover, in some cases, there is a preferential tax treatment for modest pensions paid
from private sector schemes.
Third, social security contributions are typically levied only on wage income and not on
pension benefits. However, some countries charge contributions on pension income for
health and long-term care insurance or for survivor's benefits.
4. Modeling Pensions
THIS REPORT ADOPTS A MICROECONOMIC APPROACH to comparing retirement-income systems,
looking at prospective individual entitlements under 53 countries' pension regimes. These
microeconomic techniques were first developed for the retirement-income reviews of nine
OECD countries (OECD 2001).
Future Entitlements Under Today's Rules
The pension entitlements that are compared are those that are currently legislated.
Pension-system parameters reflect, where possible, the situation in the year 2002.
Changes in rules that have already been legislated, but are being phased in gradually,
are assumed to be fully in place from the start. (In some cases where there has been sys-
temic change, such as in the Slovak Republic and Sweden, the modeling calculates what
the parameters of the new system would have been had it been in place in 2002.)
It is assumed that the pension rules remain unchanged. This steady-state assumption is
also applied to value parameters, such as the level of ceilings or basic pensions. These are
assumed to remain at the same level relative to average earnings (see the discussion on
indexation above).
Full-Career, Single Workers
The calculations show the pension entitlements of a worker who enters the system today
and retires after a full career. A full career is defined as entering at age 20 and working until
the standard pension-eligibility age, which, of course, varies among countries. The impli-
cation is that the length of career varies with the statutory retirement age: 40 years for
retirement at age 60, 45 years for retirement at 65.
The reason for modeling only full careers is that periods out of the labor market are
covered in many countries' pension systems with credits for periods in higher education,
military service, unemployment, child rearing, and so on. Assuming that people are not
covered by the pension system during career gaps would produce inaccurate figures for
pension entitlements.
The results are shown only for a single person because the rules governing benefits
for married couples are complex in many countries and entitlements depend on both
partners' career histories.
Coverage
The pension models presented here include all mandatory pension schemes for private
sector workers, regardless of whether they are public (that is, they involve payments from
government or from social security institutions, as defined in the System of National
Accounts) or private. Systems with near-universal coverage are also included, provided they
25
26 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
cover at least 90 percent of employees. For example, this degree of coverage of occupational
plans is achieved through centralized collective bargaining in the Netherlands and in
Sweden.
In Canada, Denmark, the United Kingdom, and the United States, there is broad cover-
age of voluntary, occupational pensions, and these play an important role in providing
retirement incomes. However, coverage is significantly below 90 percent, so they have not
been included. However, results including these schemes are available in the OECD report
(OECD 2005).
Mandatory personal pensions, known as individual accounts in some countries, are also
included. These are of the defined-contribution type, so the pension benefit depends on
contributions made and investment returns earned. The countries that have recently intro-
duced these schemes have made them mandatory for new labor-market entrants; the
majority of older workers are covered only by the old, public schemes in some of these
countries. This report focuses on the retirement-income arrangements of new labor-market
entrants, and so assumes that people are covered by defined-contribution pensions.1
Resource-tested benefits for which retired people may be eligible are also included in
pension models. As described above, these can be means tested, where both assets and
income are taken into account, purely income tested, or withdrawn only against pension
income. Leaving these benefits out of the model would give a misleading picture of the
situation of low-income retirees. The comparisons assume all entitled pensioners take up
these benefits. Where there are broader means tests, taking account also of assets, the
income test is taken as binding. It is assumed that the entire income during retirement
comes from the mandatory pension scheme when calculating pension entitlements (or
from the voluntary pension in the four countries where these are modeled).
In many countries, there are entirely separate schemes for civil servants and other
public sector workers (see Palacios and Whitehouse [2005] for an analysis of these
schemes). Some countries also have special programs for agricultural workers and the
self-employed. These schemes are not included here. The comparisons currently look only
at the main national scheme for private sector employees.
Pension entitlements are compared for workers with earnings between 0.3 times and
3.0 times the economywide average. This large range permits the pensions of both the
poorer and richer workers to be examined, and it is sufficiently broad to include people
who are employed part-time.
Economic Variables
The comparisons of pension entitlements are based upon a single set of economic assump-
tions for all countries. In practice, the level of pensions received is affected by economic
growth, wage growth, and inflation, and these vary across countries. A single set of
assumptions, however, ensures that the outcomes of the different pension regimes are
not affected by different economic conditions. In this way, differences across countries in
pension levels reflect differences in pension systems and policies alone.
The baseline assumptions are the following:
� Real earnings growth is 2.00 percent per year (given the assumption for price inflation,
this implies nominal wage growth of 4.55 percent).
� Individual earnings are assumed to grow in line with the economywide average. Thus,
in the baseline case, the individual is assumed to remain at the same point in the earn-
ings distribution, earning the same percentage of average earnings in every year of the
working life.
MODELING PENSIONS 27
� Price inflation is 2.5 percent per year.
� Real rate of return on defined-contribution pensions is 3.5 percent per year.2
� Discount rate (for actuarial calculations) is 2 percent per year.
� Mortality rates are calculated with baseline modeling, which uses country-specific
projections (made in 2002) from the United Nations and the World Bank population
database for the year 2040.
Changes in these baseline assumptions will obviously affect the resulting pension
entitlements. The OECD report (OECD 2005) includes a sensitivity analysis of the effect of
these assumptions.
This analysis allows, for example, for economywide earnings growth of between 0 and
3 percent per year, for returns on defined-contribution schemes of between 0 and 6 percent
per year, and for individual earnings that grow faster than the economywide average by
up to 2 percentage points per year or slower by up to 1 percentage point per year.
Defined-Contribution Schemes
Where there are data on administrative changes, these are deducted from the contribution
in calculating benefits. (See Whitehouse [2000, 2001] for a discussion of administrative
charges.)
The calculations assume that when DC benefits are received in retirement, they are paid
in the form of a price-indexed life annuity at an actuarially fair price.
Studies of voluntary annuity markets in the United Kingdom and the United States
have shown that annuities pay out less than they would if insurance companies were to
base their calculations on the relevant interest rates and projected population mortality.
This does not mean that prices are "actuarially unfair" since they reflect the longer life
expectancy of people who choose to buy an annuity. In mandatory annuity markets, which
are relevant to the mandatory DC schemes modeled in this paper, prices are much closer to
the actuarially fair level (Finkelstein and Poterba 2002, 2004).
The actuarially fair annuity rate is calculated from mortality data. Because of improve-
ments in life expectancy, someone retiring at a given age after having contributed a given
amount to a DC scheme will in the future receive a lower pension than a person retiring
today would receive.
Similarly, the notional annuity rate in notional-accounts schemes is calculated from
mortality data using the indexation rules and discounting assumptions employed by
each country.
Average Earnings
It is difficult to produce data on average earnings that are consistent across countries.
Consequently, the OECD's average-production worker series is currently the only one avail-
able for all 30 OECD member countries (OECD 2005). For the 23 countries that are not mem-
bers of the OECD, average earnings figures have been obtained from national sources.
Taxes and Social Security Contributions
The information on taxes and social security contributions on which the calculations of the
net indicators are based can be found in each country chapter in Part II of this report. For the
30 OECD countries, the chapters describe the tax and social security contribution regimes in
each country as they applied to pensioners in 2002. General provisions and the tax treatment
28 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
of workers for 2002 can be found in the OECD report Taxing Wages (2003). The conventions
used in that report, such as which payments are considered taxes, are discussed here.
For the 23 countries that are not in the OECD, country chapters include information on
tax treatment of both pensioners and workers and general information on the tax schedule
and rates of social security contributions.
The same steady-state assumption used for pensions is also applied here. The modeling
assumes that tax systems and social security contributions remain unchanged in the future.
This implicitly means that value parameters, such as tax allowances or contribution ceilings,
are adjusted annually in line with average earnings, while rate parameters, such as the per-
sonal income tax schedule and social security contribution rates, remain unchanged.
Indicators and Results
The basic indicators used in this paper are as follows:
� Replacement rate, pension entitlements as a share of individual lifetime-average
earnings
� Relative pension level, pension entitlements as a share of average economywide
earnings
� Pension wealth, the discounted stream of future pension payments
The replacement rate is best interpreted as an indicator of the insurance role of the
pension system. It shows to what extent pension systems aim to preserve the previous,
personal standard of living of a worker moving from employment into retirement.
Often, the replacement rate is expressed as the ratio of the pension over the final earn-
ings a worker had before retirement. However, the indicator used here shows the pension
benefit as a share of individual lifetime-average earnings (revalued in line with economy-
wide earnings' growth). Under the baseline assumptions, workers earn the same percentage
of economywide average earnings throughout their career, meaning that their individual
earnings track the assumed growth in economywide earnings. In this case, lifetime-
average revalued earnings and individual final earnings are identical.
Expressed algebraically, individual earnings in any time period i can be expressed as a
multiple of earnings in the base period (w0):wi = w0 (l + g)i where w is earnings and g is the
growth of (individual and economywide) earnings. Revaluing pay in line with earnings
growth gives for each period: wi = w0 (l + g)i (l + g)R . This is constant over time so final and
�i
lifetime-average revalued earnings are equal.
If people move up the earnings distribution as they get older, then their earnings just
before retirement would be higher than they were on average over their lifetimes. In that
case, replacement rates calculated on individual final earnings would be lower than those
calculated on individual lifetime-average revalued earnings.
For comparison of countries that use different earnings measures, pension entitle-
ments for all countries are presented as a proportion of individual lifetime-average earn-
ings revalued in line with growth in economywide average earnings. Most of the OECD
countries' earnings-related pension schemes use individual lifetime-average pay reval-
ued in line with economywide average earnings--the same as the earnings measure to
calculate pensions (table 3.5). For others, replacement rates presented here look different
than those calculated using the earnings measure based on the rules of the national
pension systems.
The relative pension level is best seen as an indicator of pension adequacy since it
shows what benefit level a pensioner will receive in relation to the average wage earner in
the respective country. Individual replacement rates may be quite high, but the pensioner
MODELING PENSIONS 29
may still receive only a small fraction of economywide average earnings. If, for example,
a low-income worker--who earned only 30 percent of economywide average earnings--has
a replacement rate of 100 percent, the benefit will amount to only 30 percent of economy-
wide average earnings. For an average wage earner, the replacement rate and the relative
pension level will be the same.
Pension wealth is an indicator that takes into account all future pension payments to a
retiree. It therefore depends not only on the level of pensions paid, but also on how long
they are paid. The number of years that someone can expect to receive a pension will
depend both on the age of retirement and life expectancy at that age. The way that benefits
are adjusted to price or wage growth during the period of payment will also influence
pension wealth. The details of calculating pension wealth are set out below.
A Worked Example
X starts working at age 20 and works continuously until he retires at age 65. He starts out
with an annual salary of $10,000. The salary corresponds to 75 percent of economywide
average earnings at that time. His earnings grow by 2 percent each year. Economywide
earnings grow at the same rate. X thus earns 75 percent of average earnings over his entire
career.
When X retires, all his past salaries between the time that they were earned and the
retirement age are increased in line with the growth in economywide average earnings, a
procedure called valorization in this report (see above). In this case, valorization is linked
to economywide average-earnings growth. X's lifetime-average revalued salary, which is
the earnings measure used in the pension calculation, is $23,900.
The explanation is as follows: taking i as the number of years since labor-market entry,
valorization means that each year's earnings are increased by 1.02(44-i . Each year, X's earn-
)
ings increase by a constant amount, so at any given time they are equal to earnings at entry
age ($10,000) multiplied by 1.02i. Thus, in each year of the working life, revalued earnings
are first-year earnings multiplied by 1.0244-i 1.02i, giving average lifetime-revalued earnings
of $10,000 1.0244 = $23,900.
The pension system has an accrual rate of 1.5 percent of earnings per year. X's gross
pension is thus 45 0.015 $23,900 = $16,130. His gross replacement rate is $16,130/
$23,900 = 67.5%.
On his gross pension, X has to pay 10 percent in taxes and health-insurance contribu-
tions. The net pension is therefore $16,130 (100 � 10)% = $14,510. While he was work-
ing, X had to pay 20 percent in taxes and social security contributions so that his net
earnings at the time of retirement were $19,120. His net replacement rate is therefore
$14,510/$19,120 = 75.9%.
To assess his pension level relative to average earnings, X divides his gross pension
entitlement by gross average economywide earnings in the year of retirement. X's earn-
ings at retirement are $23,900, while the economywide average is $31,790 (since X earns 75
percent of the average). Thus, X's gross relative pension level is $16,130/$31,790 = 50.7%.
The net relative pension level is calculated in the same way but using the taxes and
social security contributions that X pays as a pensioner and a worker pays on average
gross earnings. Workers on average gross earnings pay 25 percent in taxes and social
security contributions, giving net average earnings of $31,790 (100 � 25)% = $23,840.
Therefore, X's net relative pension level is $14,510/$23,840 = 60.6%.
When X retires, male life expectancy at age 65 will be 83 years in his country, giving an
expected retirement duration of 18 years. X's pension wealth is the discounted stream of
pension payments during retirement, weighted by the probability that he will still be alive
30 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
at that particular age. The discount rate is designed to reflect the fact that money received
in the future is worth less than money received today; the rate used is 2 percent per year.
The calculation also allows for the postretirement adjustment of pension benefits: in this
case, X's pension is increased annually in line with price inflation. The actuarial calcula-
tions show that the present value of pension benefits is 14.8 times the annual flow (which
is less than the 18 years' expected duration of retirement because future benefits are
discounted).
Notes
1. See Mattil and Whitehouse (forthcoming) for a discussion.
2. This rate of return is assumed to be net of administrative charges. In practice, this
assumption might disguise genuine differences in administrative fees between countries.
See Whitehouse (2000, 2001).
5. Pension Entitlements
GROSS REPLACEMENT RATES ARE COMPARED ACROSS 53 COUNTRIES for people with different
levels of earnings. Table 5.1 shows gross replacement rates at earnings between 0.5 and 2.5
times the average.
The replacement rate at average earnings is perhaps the most familiar indicator in
pension analysis. At this earnings level, the average gross replacement rate is 56 percent
in the 24 high-income OECD countries. The average replacement rate is exactly the same
in the 10 countries of Eastern Europe and Central Asia and very similar, on average, in the
9 countries of Latin America and the Caribbean. However the pension promise is much
larger in the Middle East and North Africa: the replacement rate averages 78 percent in the
10 countries analyzed, meaning pensions are nearly 40 percent higher on average than in
the other 43 countries.
There is substantial variation within all the regions. The most diverse region (measured
by the ratio of the standard deviation to the mean) is Latin America and the Caribbean.
Projected replacement rates vary from 36 percent in Mexico to over 100 percent in
Uruguay (meaning that the pension is higher than earnings before retirement).
The high-income OECD countries are similarly (albeit slightly less) diverse. Luxembourg
is an outlier: the replacement rate for a full-career worker exceeds 100 percent. Austria,
Greece, Italy, and Spain also provide high pensions to full-career workers on average
earnings: replacement rates exceed 75 percent. The gross replacement rate at average earn-
ings is approximately 50 percent in France, Iceland, Japan, and Norway. Not surprisingly,
Ireland--which has only basic and targeted pensions and no earnings-related scheme--has
the lowest replacement rate at average earnings. In the United Kingdom, the earnings-
related public scheme does not result in a high pension: the scheme has a low accrual rate
and does not cover the first slice of earnings (up to approximately one-fifth of the average).
Eastern Europe and Central Asia has more uniform replacement rates than high-income
OECD and Latin American and Caribbean countries. Half of the countries are in the 50�60
percent range. Nevertheless, there is still substantial variation, from 38 percent in Croatia
to 87 percent in Turkey.
The Middle East and North African replacement rates are uniform to a similar degree as
Eastern Europe and Central Asia's. Djibouti is something of an outlier: its recent reform
substantially cut the pension promise. The gross replacement rate at average earnings of
37.5 percent is one of the lowest in the whole group of 53 countries. In contrast, the other
countries in this region offer high pensions: half of the 10 countries have replacement rates
at average earnings of 80 percent or more. Half of the highest 12 replacement rates are
found in Middle Eastern and North African countries.
Low Earners
At low earnings, defined as half of the average, the pension entitlements of full-career
workers vary less than they do at average earnings among the high-income OECD coun-
tries. The average replacement rate at half of the average is 75 percent.
31
32 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 5.1. Gross Replacement Rates by Earnings Level, Mandatory Pension Programs, Men
(Percentage of individual preretirement gross earnings)
Individual earnings, multiple of average
0.5 0.75 1 1.5 2 2.5
High-income OECD countries
Australia 65.1 48.4 40.0 31.7 26.2 21.9
Austria 78.3 78.3 78.3 78.3 64.3 51.5
Belgium 61.6 41.1 37.3 31.9 23.9 19.2
Canada 72.4 52.4 42.5 28.4 21.3 17.0
Denmark 82.4 56.4 43.3 30.3 23.8 19.8
Finland 80.0 71.5 71.5 71.5 71.5 71.5
France 84.2 56.1 49.4 47.3 44.0 42.1
Germany 47.3 45.8 45.8 45.8 37.6 30.1
Greece 84.0 84.0 84.0 84.0 84.0 84.0
Iceland 85.5 63.7 52.8 42.8 41.3 40.3
Ireland 61.3 40.9 30.6 20.4 15.3 12.3
Italy 78.8 78.8 78.8 78.8 78.8 78.8
Japan 69.2 56.6 50.3 44.0 36.9 29.5
Korea, Rep. of 60.9 47.4 40.6 33.8 29.3 23.5
Luxembourg 115.5 106.5 101.9 97.4 95.2 89.8
Netherlands 68.7 68.3 68.3 68.3 68.3 68.3
New Zealand 75.1 50.1 37.6 25.0 18.8 15.0
Norway 65.3 56.1 52.6 46.5 38.4 31.8
Portugal 103.1 68.8 66.7 65.9 65.5 64.7
Spain 80.1 80.1 80.1 80.1 75.6 60.5
Sweden 87.8 72.5 64.8 64.6 66.2 67.1
Switzerland 62.8 60.2 58.2 44.2 33.1 26.5
United Kingdom 67.4 46.4 37.1 29.3 22.5 18.0
United States 53.1 44.6 40.3 36.1 30.6 27.0
Average 74.6 61.5 56.4 51.1 46.4 42.1
Eastern Europe and Central Asia
Bulgaria 49.7 49.7 49.7 49.7 40.0 33.5
Croatia 47.3 41.3 38.4 35.4 33.9 33.0
Czech Republic 70.5 53.3 44.4 31.7 25.4 21.6
Estonia 58.4 53.9 51.6 49.4 48.2 47.5
Hungary 75.4 75.4 75.4 75.4 75.4 66.3
Latvia 63.6 58.2 58.2 58.2 58.2 58.2
Lithuania 69.9 58.9 53.4 47.8 45.1 43.4
Poland 56.9 56.9 56.9 56.9 56.9 55.8
Slovak Republic 48.6 48.6 48.6 48.6 48.6 48.6
Turkey 96.2 90.2 87.2 84.1 71.9 57.5
Average 63.7 58.6 56.4 53.7 50.4 46.5
Latin America and the Caribbean
Argentina 104.6 76.6 62.6 48.6 41.6 37.4
Chile 45.0 43.8 43.8 43.8 43.8 43.8
Colombia 100.0 66.7 50.0 46.1 46.1 46.1
Costa Rica 89.0 89.0 89.0 89.0 89.0 89.0
Dominican Republic 105.3 70.2 52.6 35.1 29.4 29.4
El Salvador 64.1 42.7 38.7 38.7 38.7 38.7
(continued on the next page)
PENSION ENTITLEMENTS 33
Table 5.1. (continued)
Individual earnings, multiple of average
0.5 0.75 1 1.5 2 2.5
Mexico 39.1 37.0 36.0 34.9 34.4 34.1
Peru 49.4 39.1 39.1 39.1 39.1 39.1
Uruguay 102.6 102.6 102.6 90.5 72.8 58.2
Average 77.7 63.1 57.2 51.8 48.3 46.2
Middle East and North Africa
Algeria 80.0 80.0 80.0 80.0 80.0 80.0
Bahrain 84.0 79.2 79.2 79.2 79.2 79.2
Djibouti 42.5 37.5 37.5 37.5 37.5 37.5
Egypt, Arab Rep. of 90.5 87.0 85.3 75.2 63.6 50.9
Iran, Islamic Rep. of 132.0 115.5 115.5 115.5 115.5 115.5
Jordan 69.6 67.5 67.5 67.5 67.5 67.5
Libya 80.0 80.0 80.0 80.0 80.0 80.0
Morocco 70.0 70.0 70.0 70.0 70.0 61.1
Tunisia 64.0 64.0 64.0 64.0 64.0 64.0
Yemen, Rep. of 100.0 100.0 100.0 100.0 100.0 100.0
Average 81.3 78.1 77.9 76.9 75.7 73.6
Source: Axia Economics APEX model, 2002.
Note: n.a. = not applicable. n. acs.= notional accounts. [w] = varies with earnings; [y] = varies with years of
service; [a] = varies with age.
As at average earnings, Luxembourg has the highest pensions, offering a replacement
rate above 115 percent. Another set of high-income OECD countries have high pensions
for low earners but offer average earners replacement rates nearer the average for all
countries. Portugal, for example, has an exceptionally high minimum pension, and the
earnings-related scheme has a higher accrual rate for low-income workers. Similarly,
France, Iceland, and Sweden have relatively high income-tested or minimum pensions.
At the other end of the scale, German social assistance and the means-tested scheme in
the United States pay only about one-fifth of average economywide earnings (table 3.1).
This means that gross replacement rates for workers on half average earnings are approxi-
mately 50 percent. Countries with redistributive systems, such as Canada, New Zealand,
and the United Kingdom, pay little to workers on average earnings, but they move more
toward the middle of the scale when it comes to benefits for low earners. Replacement
rates for low and average earners in the Netherlands are very similar, even though the
basic pension, worth more than a third of average earnings (table 3.1), is at a fairly high
level. This is because of the franchise, a calculation mechanism applied in the Netherlands,
which means that occupational pensions are not earned on the first slice of earnings. The
Netherlands therefore has the 7th highest replacement rate among the high-income OECD
countries for average earners, but only the 15th highest for low earners.
In Eastern Europe and Central Asia, countries tend to offer a slightly higher replace-
ment rate to low earners than to middle earners. The replacement rate is 64 percent on
average for low earners.
Latin America and Caribbean countries pay gross replacement rate of 78 percent to low
earners, somewhat more than the OECD countries. Argentina, Colombia, Costa Rica, the
Dominican Republic, and Uruguay have among the highest replacement rates for low
earners of all 53 countries.
34 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
In the Middle East and North Africa, replacement rates for low-income workers are, on
average, a little higher than they are for middle earners: 81 and 78 percent, respectively.
In half of the countries, the replacement rates are the same at the two earnings levels.
High Earners
Finally, at high earnings, Luxembourg has the highest replacement rate of the high-income
OECD countries, with a replacement rate a little short of 95 percent. (High earnings are
defined as double the economywide average.) The Islamic Republic of Iran and the
Republic of Yemen pay 100 percent or greater replacement rates even to high earners.
The effect of pension ceilings is apparent on benefits in some countries that paid high
replacement rates to middle earners but much lower replacement rates to high earners.
These include Egypt, Turkey, and Uruguay.
The countries with pure flat-rate systems--Ireland and New Zealand--are naturally the
least generous to these high earners, even with New Zealand's exceptionally high basic pen-
sion of nearly 40 percent of average earnings. Canada and the United Kingdom--although
they have earnings-related schemes--also provide benefits that are broadly flat rate.
On average, replacement rates are approximately 10 percentage points lower for high
earners than middle earners in the high-income OECD countries and in Latin America and
the Caribbean. This differential is about six points in Eastern Europe and Central Asia. The
replacement rates are the same for middle and high earners (with double average pay) in
all of Middle East and North Africa except Egypt.
6. Net Pension Entitlements
THE AMOUNT OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS people have to pay affects
living standards when working and in retirement. The net replacement rate, presented
in table 6.1, takes this effect into account. It shows individual net pensions relative to
individual net earnings.1
As expected, net replacement rates are higher than gross replacement rates. For the 24
high-income OECD countries, net replacement rates are one-fifth larger than gross
replacement rates for average earners: 68 percent rather than 56 percent. The difference is
even larger in Eastern Europe and Central Asia. The 30 percent differential between net
and gross replacement rates stems from the fact that many countries do not tax pensions or
effectively do not tax pensions because standard income tax reliefs are so high that very
few retirees are liable for tax.2 Net replacement rates average 73 percent, compared with 56
percent for gross in Eastern Europe and Central Asia. The differentials are smaller in the
other two groups of countries: 13 percent in Latin America and the Caribbean and 15 percent
in the Middle East and North Africa. The smaller differential reflects the smaller overall
tax burden in these countries compared with high-income OECD countries or Eastern
Europe and Central Asia. In addition, tax concessions either for pensioners or for pension
income are less common.
Among the high-income OECD countries, the difference in taxes paid by pensioners
and workers is the highest in Belgium and Germany. In Belgium the large difference is
because of the strongly progressive direct tax system, the relatively high direct tax burden,
and the relatively low gross replacement rate. In Germany, the difference between gross
and net replacement rates reflects the generous tax treatment of pension income. The effect
of taxes and contributions on net versus gross entitlements is the smallest in Korea and
Luxembourg. In Korea, this is because of a low general tax burden. In Luxembourg, the
high gross replacement rate of approximately 100 percent means that older people do not
benefit from the general progressivity of the tax system in the way that they do in other
OECD countries with gross replacement rates much lower than 100 percent.
In Eastern Europe and Central Asia, taxes and contributions affect the results most
significantly in Bulgaria, which does not tax pension income, and Croatia, which does not
levy contributions on pension income and has a much higher tax allowance for
pensioners than for workers. The smallest differentials in this group of countries--in
Estonia and Turkey--are still, however, only a little below the average for the high-income
OECD countries.
In Latin America and the Caribbean and in the Middle East and North Africa, there is
much less variation than in the other groups in the differential between gross and net
replacement rates. The only exception is Egypt, with a gross replacement rate of 85 percent
for an average earner and a net replacement rate of 120 percent because pension income is
not subject to tax.
Measured on a net basis, pension entitlements in the Middle East and North Africa
remain the highest, with an average of 88 percent. The other entitlements for average
35
36 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Table 6.1. Net Replacement Rates by Earnings Level, Mandatory Pension Programs, Men
(Percentage of individual preretirement net earnings)
Individual earnings, multiple of average
0.5 0.75 1 1.5 2 2.5
High-income OECD countries
Australia 77.0 61.2 52.4 43.1 36.5 31.3
Austria 91.2 93.4 93.2 93.5 79.3 63.2
Belgium 82.7 63.8 62.8 50.6 40.6 34.2
Canada 89.4 67.6 57.1 39.5 30.6 25.1
Denmark 95.6 68.0 54.1 42.5 35.5 30.8
Finland 90.7 78.8 78.8 79.2 78.3 79.3
France 98.0 70.8 65.0 58.7 55.3 53.4
Germany 61.7 66.6 71.8 79.2 67.0 54.2
Greece 99.9 99.9 99.9 99.9 99.9 99.9
Iceland 95.8 77.1 65.9 54.1 57.2 55.1
Ireland 63.0 47.0 36.6 27.4 21.9 18.3
Italy 89.3 88.0 88.8 88.4 89.1 89.0
Japan 80.1 66.3 59.1 51.9 44.3 35.8
Korea, Rep. of 65.3 51.4 44.3 38.1 34.0 27.8
Luxembourg 125.0 115.0 109.8 105.6 104.2 100.1
Netherlands 82.5 88.2 84.1 85.8 83.8 82.8
New Zealand 77.1 52.0 39.5 27.9 22.0 18.1
Norway 85.5 73.1 65.1 58.2 50.1 42.8
Portugal 115.9 79.8 79.8 84.4 86.3 86.9
Spain 88.7 89.4 88.3 88.4 83.4 68.8
Sweden 90.2 76.4 68.2 70.1 74.3 75.0
Switzerland 71.4 68.9 67.3 53.0 41.4 34.3
United Kingdom 78.4 57.7 47.6 38.2 29.8 24.7
United States 61.4 54.6 51.0 44.9 39.0 35.5
Average 85.7 73.1 67.9 62.6 57.7 52.8
Eastern Europe and Central Asia
Bulgaria 67.1 73.8 75.2 74.0 61.8 52.9
Croatia 66.7 63.1 61.6 59.7 59.6 58.9
Czech Republic 88.3 68.3 58.2 42.9 35.3 31.0
Estonia 59.9 60.6 60.9 61.3 61.5 61.7
Hungary 86.6 90.9 90.5 99.1 92.6 81.8
Latvia 89.2 83.7 81.8 76.7 74.1 72.5
Lithuania 81.7 75.1 71.3 67.2 64.9 63.5
Poland 69.6 69.7 69.7 69.8 70.5 71.0
Slovak Republic 58.2 59.4 60.2 63.1 65.7 67.8
Turkey 113.2 106.7 103.3 99.9 84.3 66.8
Average 78.1 75.1 73.3 71.4 67.0 62.8
Latin America and the Caribbean
Argentina 119.2 89.3 73.7 57.8 50.3 45.7
Chile 53.3 52.6 53.5 54.5 56.3 58.5
Colombia 108.8 72.6 54.4 50.2 50.2 50.3
Costa Rica 102.9 103.0 103.1 103.1 103.2 103.2
Dominican Republic 111.8 74.6 55.9 37.3 31.6 32.6
(continued on the next page)
NET PENSION ENTITLEMENTS 37
Table 6.1. (continued)
Individual earnings, multiple of average
0.5 0.75 1 1.5 2 2.5
El Salvador 65.1 43.4 39.3 41.2 44.3 44.4
Mexico 50.4 46.4 45.1 44.3 44.1 44.2
Peru 54.8 43.4 43.9 46.4 47.8 48.3
Uruguay 125.1 125.3 125.4 110.8 89.5 71.8
Average 87.9 72.3 66.0 60.6 57.5 55.4
Middle East and North Africa
Algeria 89.6 89.3 89.1 88.8 88.7 88.7
Bahrain 88.4 83.4 83.4 83.4 83.4 83.4
Djibouti 48.7 42.8 43.4 44.7 45.3 44.6
Egypt, Arab Rep. of 117.5 118.3 119.8 104.8 90.5 73.5
Iran, Islamic Rep. of 141.9 124.2 124.2 126.5 129.5 131.3
Jordan 77.5 75.2 76.1 77.2 77.7 78.7
Libya 89.0 90.2 91.2 93.6 96.1 98.8
Morocco 72.6 72.6 74.1 75.2 75.8 68.1
Tunisia 73.1 72.8 72.7 73.5 73.4 73.9
Yemen, Rep. of 106.2 106.3 106.3 106.3 106.3 106.3
Average 90.5 87.5 88.0 87.4 86.7 84.7
Source: Axia Economics APEX model, 2002.
Note: n.a. = not applicable. n. acs.= notional accounts. [w] = varies with earnings; [y] = varies with years of
service; [a] = varies with age.
earners are 73 percent in Eastern Europe and Central Asia, 68 percent in high-income
OECD countries, and 66 percent in Latin America and the Caribbean.
The effect of taxes and contributions on net replacement rates for low earners (at half
average earnings) is more muted than for average earners in nearly every case. This is
because low-income workers typically pay less in taxes and contributions than those with
average earnings. In many cases, their retirement incomes are below the level of income tax
standard reliefs (allowances, credits, and so on). Thus, they are unable to benefit fully from
these additional reliefs. Compared with the 20 percent differential between net and gross
replacement rates at average earnings in high-income OECD countries, the difference for
low earners is 15 percent on average. There is a similar effect in Eastern Europe and Central
Asia, with a 30 percent differential at average earnings and 23 percent at half average.
Similarly, taxes and contributions mean that net replacement rates are higher than gross
replacement rates for high earners than for average earners in most countries.
Net replacement rates have the highest average in the Middle East and North Africa, at
nearly 90 percent for average earners, just over 90 percent for low earners (on half the
average), and 87 percent for high earners (on double the average). They are especially high
in the Islamic Republic of Iran, at approximately 125 percent and even higher for low earn-
ers. Net replacement rates exceed 100 percent for all earners in the Republic of Yemen and
for low and middle earners in Egypt.
The net replacement rate is 73 percent for average earners in Eastern Europe and
Central Asia, 68 percent in the high-income OECD countries, and 66 percent in Latin
America and the Caribbean. For low earners, the difference between the four groups of
countries is smaller, with net replacement rates ranging from 78 percent in Eastern Europe
and Central Asia to just over 90 percent in Middle East and North Africa.
38 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Notes
1. See Keenay and Whitehouse (2002a, 2002b, 2003a, 2003b) for a more detailed analysis
of the role of personal taxes in old-age support.
2. These differentials are percentages, not percentage points.
7. The Link between Pension and
Earnings
DIFFERENT COUNTRIES' PENSION SYSTEMS STRIKE very different balances between the
goals of adequacy--guaranteeing that all older people meet a minimum standard of
living--and insurance--ensuring a certain standard of living in retirement relative to
that when working.
The relative pension level is the individual pension divided by economywide average
earnings rather than by individual earnings as in the replacement rate results presented
above. Figure 7.1 shows relative pension levels on the vertical axis and individual preretire-
ment earnings on the horizontal. Countries have been grouped by the degree to which pen-
sion benefits are related (or not) to individual preretirement earnings. For each region, the
results are ordered from the weakest to the strongest link between pension and earnings.
The 24 high-income OECD countries have been divided into four groups. In the first
set of four countries (fig. 7.1a), there is little or no link between pension entitlements and
preretirement earnings. In Ireland and New Zealand, pension benefits are purely flat rate.
In Canada, the relative pension level varies little: from 36 percent for low earners to 42 percent
for those on average earnings and above. Although Canada has an earnings-related
pension scheme, its target replacement rate is very low, its ceiling is set at average
economywide earnings, and a resource-tested benefit is withdrawn against additional
income from the earnings-related scheme. Thus, the relative pension level changes little
with individual preretirement earnings, although the composition of the pension package
varies (between targeted, basic, and earnings-related benefits). In Denmark, basic and tar-
geted schemes dominate the mandatory retirement-income regime.
In the second set of five countries (fig. 7.1b), the link between pension entitlements and
preretirement earnings is also weak, despite the fact that all of the countries have manda-
tory earnings-related or defined-contribution pensions. Australia, Iceland, and the United
Kingdom all have significant resource-tested public schemes. There are important mini-
mum credits in the earnings-related pension plans of Belgium and the United Kingdom.
The Korean pension system has a strongly progressive formula since benefits depend on
both individual and economywide average earnings.
At the other end of the spectrum lie countries with a very strong link between pension
entitlements and preretirement earnings (fig. 7.1d). In Finland and the Netherlands, there
is no ceiling on pensionable earnings in the occupational schemes. In Italy, the ceiling on
pensionable earnings in the public plan is well over three times average economywide
earnings. In these countries, the replacement rate is constant for much of the earnings
range. The contrast with the nine countries in figures 7.1a and 7.1b--where pension values
are constant or close to flat, and replacement rates decline with earnings--is stark.
The final six high-income OECD countries lie toward the middle in terms of the link
between pension entitlements and preretirement earnings (fig. 7.1c). In Switzerland,
Norway, and the United States, this results mainly from progressive formulae in earn-
ings-related schemes. Redistributive programs--minimum and targeted schemes in
France and Portugal, the basic scheme in Japan--explain these other countries' presence
in this group.
39
40 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Figure 7.1. The Link between Preretirement Earnings and Pension Entitlements
(Gross pension entitlement as a proportion of economywide average
earnings to individual earnings)
a. Canada, Denmark, Ireland, and b. Australia, Belgium, Iceland, Korea, and
New Zealand the United Kingdom
2.5 2.5
2.0 2.0
levels levels
1.5 1.5
pension pension
1.0 1.0
relative relative
0.5 0.5
gross gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
Canada Denmark Australia Belgium Iceland
Ireland New Zealand Korea, Rep. of United Kingdom
c. France, Japan, Norway, Portugal, d. Austria, Finland, Germany, Greece, Italy,
Switzerland, and the United States Luxembourg, Netherlands, Spain, and Sweden
2.5 2.5
2.0 2.0
levels levels
1.5 1.5
pension pension
1.0 1.0
relative relative
0.5 0.5
gross gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
France Japan Norway Austria Finland Germany Greece
Portugal Switzerland United States Italy Luxembourg Netherlands
Spain Sweden
e. Bulgaria, Croatia, the Czech Republic, f. Estonia, Hungary, Latvia, Poland, and
Lithuania, and Turkey the Slovak Republic
2.5 2.5
2.0 2.0
levels levels
1.5 1.5
pension pension
1.0 1.0
relative relative
0.5 0.5
gross gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
Bulgaria Croatia Czech Republic Estonia Hungary Latvia
Lithuania Turkey Poland Slovak Republic
(continued on the next page)
THE LINK BETWEEN PENSION AND EARNINGS 41
Figure 7.1. (continued)
g. Argentina, Colombia, and h. Chile, Costa Rica, El Salvador,
the Dominican Republic Mexico, Peru, and Uruguay
2.5 2.5
2.0 2.0
levels levels
1.5 1.5
pension pension
1.0 1.0
relative relative
0.5 0.5
gross gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
Argentina Colombia Chile Costa Rica El Salvador
Dominican Republic Mexico Peru Uruguay
i. Bahrain, Djibouti, the Arab Republic of Egypt, j. Algeria, Libya, Morocco, Tunisia,
the Islamic Republic of Iran, and Jordan and the Republic of Yemen
2.5 2.5
2.0 2.0
levels levels
1.5 1.5
pension pension
1.0 1.0
relative relative
0.5 0.5
gross gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
Bahrain Djibouti Egypt, Arab Rep. of Algeria Libya Morocco
Iran, Islamic Rep. of Jordan Tunisia Yemen, Rep. of
Note: To ease comparisons between countries, the vertical axis is capped at 2.5.
There is a similar degree of divergence in the relationship between pension entitlements
and earnings in Latin America and the Caribbean (figs. 7.1g and 7.1h). Argentina has a sig-
nificant, public basic scheme, resulting in a relatively flat profile of pension level against
preretirement earnings. In Colombia and the Dominican Republic, there are very high
minimum pensions worth 50 percent or more of average earnings. Given the contribution
rate required for the defined-contribution scheme, workers with earnings beyond average
earnings in Colombia, and well beyond the average in the Dominican Republic, would
still be entitled to the minimum pension.
There are six Latin American countries with a closer link between earnings and pen-
sion entitlements. In Chile, El Salvador, Mexico, and Peru, the contributions to defined-
contribution schemes are fairly comparable, and minimum pensions are set at a similar
level relative to average earnings, much below the level in Colombia and the Dominican
Republic, for example. Costa Rica and Uruguay still have public, defined-benefit schemes.
In Costa Rica, the schemes have quite a high replacement rate, with the defined-contribution
42 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
plan providing additional pension. In Uruguay, the defined-benefit and defined-contribution
schemes cover different slices of earnings.
In the Middle East and North Africa, there is generally a close link between earnings
and pension entitlement. Coverage of retirement-income systems in this region is gener-
ally much narrower than in the other groups of countries. It is unsurprising that there
should be a close link between earnings and pensions when coverage is narrow because
redistribution is difficult under such circumstances. Ceilings affect the results only in
Egypt and Morocco. Minimum pensions are significant in Djibouti, Jordan, and, especially,
the Islamic Republic of Iran. Elsewhere, minimum pensions affect only a very small
number of full-career workers.
The relationship between pension and earnings is more diverse in Eastern Europe and
Central Asia. Again, the left-hand panel (fig. 7.1e) shows the countries with the weaker
link, the right-hand, those with a stronger link. In Croatia, the Czech Republic, and Lithuania,
there is a basic element to pensions. In Bulgaria, there is a maximum pension that affects
the earnings-related benefits of higher earners. The Czech Republic also has a progressive
formula in its earnings-related pension scheme.
The other countries of Eastern Europe and Central Asia (fig. 7.1f) have a strong link
between pensions and earnings. In Estonia, Latvia, and the Slovak Republic ceilings on
pensionable pay are three times economywide average earnings or more. Minimum pen-
sions are also fairly low in these countries: 14 percent of average earnings in Estonia and
24 percent in Poland, for example.
8. Conclusions
THE 53 COUNTRIES ANALYZED SHOW NUMEROUS, very different approaches to pension
provision. They vary in many dimensions.
Target Replacement Rate
First, pension provision differs in the target replacement rate. The gross replacement rate
for an average earner ranges from 30 percent in Ireland to 116 percent in the Islamic
Republic of Iran. The target gross replacement rate is nearly four times higher in the
Islamic Republic of Iran than it is in Ireland. Replacement rates for average earners are also
100 percent or more in Luxembourg, Uruguay, and the Republic of Yemen. Most of the
highest targets are in the Middle East and North Africa, although replacement rates above
80 percent are also promised in Greece, Spain, and Turkey. In contrast, target replacement
rates for average earners are 40 percent or less in Australia, Djibouti, Mexico, and the
United States, among others.
The size of the target replacement rate for mandatory pensions illustrates the balance
of voluntary versus mandatory provision that particular countries have adopted. It is,
of course, no accident that voluntary private pension provision is widespread in coun-
tries such as Canada, the United Kingdom, and the United States that have relatively
small mandatory pensions. In countries with high replacement rates under the manda-
tory system, covered members have no need to make any voluntary provision for
retirement.
Adequacy versus Insurance
A second dimension in which pension systems differ is the relative emphasis placed on
redistribution or pension adequacy versus insurance or pension-replacement rates. In the
language of the typology set out at the beginning of this paper, it is the difference in
weight that is given to first-tier or second-tier pensions.
The English-speaking countries tend to emphasize pension adequacy with redistributive
pension systems that have a weak link or no link between pension entitlements and pre-
retirement earnings. Mandatory pensions are said to be targeted, meaning that replacement
rates are higher for people who had lower pay when in work. These countries include
Australia, Canada, Ireland, New Zealand, the United Kingdom, and, to a slightly lesser
extent, the United States. The emphasis on adequacy and redistribution is also strong in
some Nordic countries, such as Denmark, Iceland, and Norway. The pension systems of
Argentina, Belgium, Colombia, the Czech Republic, Croatia, the Dominican Republic, and
Switzerland are also progressive.
In the Middle East and North Africa, the emphasis is very firmly on providing the same
or very similar replacement rates to all workers, so there is a strong link between pensions
and earnings. The same is true of many continental European countries, such as Greece,
Hungary, Italy, Latvia, the Netherlands, Poland, and the Slovak Republic. In Latin
43
44 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
America and the Caribbean, only Costa Rica has such a strong link between pension
entitlements and preretirement pay.
Public or Private Provision?
A third way in which pension systems differ from one another is in the relative role of the
public and private sectors in pension provision. As discussed above, a lower target
replacement rate from the mandatory system means a larger role for voluntary, private
provision. However, in many countries, the private sector is involved in running the
mandatory pension system. The best-known cases of pension reforms that increase
the role of the private sector are in Latin America and the Caribbean. In Chile, El Salvador,
Mexico, and Peru, nearly all pension benefits in the future are likely to come from pri-
vate, defined-contribution plans. Although Costa Rica and Uruguay also have defined-
contribution schemes, the public, earnings-related benefit will continue to dominate.
Seven of the 10 countries of Eastern Europe and Central Asia under study now also
have defined-contribution provision.1 Unlike Latin America and the Caribbean, the provi-
sion acts only as a partial substitute for public, earnings-related schemes. Workers in the
new system will continue to get part of their pension from the public sector and part from
private pensions. However, even here, the balance of responsibility between public and
private sectors varies, illustrated by the range of contributions from 2 percent in Bulgaria
to the eventual 10 percent in Latvia.
There is no private sector involvement in mandatory pensions in the Middle East and
North Africa, and voluntary provision is also, in most cases, rare.
The private sector plays an important role in mandatory pension provision in approxi-
mately one-third of the high-income OECD countries. In Iceland and Switzerland, private,
occupational pensions are mandatory. In the Netherlands and Sweden, occupational pen-
sions are best thought of as quasi-mandatory, since coverage of more than 90 percent is
achieved through industrial relations agreements. Australia introduced a mandatory
defined-contribution plan in 1992, which, when mature, will play a major role in retirement-
income provision. Sweden also recently introduced a mandatory defined-contribution
scheme, while Denmark has a long-standing defined-contribution provision. Workers in
the United Kingdom were permitted to "contract out" of the public, earnings-related
scheme in 1978. Initially, only occupational defined-benefit plans were permitted to substi-
tute for the public scheme, but this has since been extended to defined-contribution
schemes. Between 50 and 75 percent of employees have used this option to substitute
private for public provision since the 1970s.
Designing the First Tier
In Latin America and the Caribbean and the Middle East and North Africa, there is little
variation in the design of first-tier, adequacy-oriented pensions. There are minimum pensions
that are part of earnings-related schemes in the Middle East and North Africa. In Latin
America and the Caribbean, minimum pensions are generally a separate, targeted public
benefit that tops up benefits from private, defined-contribution schemes. Eastern European
and Central Asian countries have also changed their first-tier pensions in fundamental pen-
sion reforms. For example, Poland abolished its basic pension when it moved to a system of
notional accounts and a minimum pension. There has been increased targeting of benefits
in high-income OECD countries. In the future, Canada, France, Sweden, and the United
Kingdom will all rely more on resource-tested benefits to provide retirement incomes.
CONCLUSIONS 45
Designing the Second Tier
In the past, public defined-benefit schemes were the way most countries provided
second-tier pensions, with few exceptions. France, Germany, and Norway have long used
points systems, which are closely related to defined-benefit schemes. Iceland and the
Netherlands have never had public, earnings-related schemes. Second-tier pension provi-
sion is now much more diverse. First, all 9 Latin American and Caribbean countries and 7
out of 10 Eastern European and Central Asian countries have introduced private, defined-
contribution plans, as discussed above. Second, countries that have maintained public
provision of earnings-related pensions have adopted a greater variety of designs. Estonia
and the Slovak Republic, for example, have adopted points systems. Italy, Latvia, Poland,
and Sweden have opted for the notional-accounts variant. These changes have all acted to
increase diversity in the design of second-tier insurance pensions.
The 53 countries studied in this paper, which span all continents of the world, have a
remarkable variety of retirement-income systems. Countries can learn valuable lessons
from each other in designing and reforming pension systems. It is hoped that this paper,
by comparing pension systems in a consistent way, will ease the transmission of construc-
tive policy lessons between countries.
Notes
1. The Slovak Republic has (since January 2005) also introduced mandatory defined-
contribution pensions.
Part II: Country Studies by Region
9. Introduction
THE FIRST PART OF PENSIONS PANORAMA COMPARED RETIREMENT-INCOME SYSTEMS across
countries. It described the parameters and rules of pension schemes and calculated the
value of pension entitlements for workers on different levels of earnings. This second part,
in contrast, proceeds country by country. It provides more detail on the parameters and
rules in each country and gives country-specific results for pension entitlements. Part I
explains the methodology underlying the calculations presented here.
The country chapters follow a standard schema. First, there are detailed descriptions of
the rules and parameters of the pension schemes:1
� Qualifying conditions, pension eligibility (or retirement) age, and years of contribu-
tions required to receive a pension.
� Benefit calculation, the rules for each of the schemes making up the pension system,
such as earnings-related schemes, mandatory private plans, and resource-tested
schemes.
� Treatment of pensioners under the personal income tax and social security contribu-
tions, including any reliefs for pension income. For OECD countries, general rules of
personal income taxes and social security contributions can be found in Taxing Wages
(OECD 2003). For countries outside the OECD, summary information on the tax
system is given in Part II.
Values of the parameters of pension, tax, and social security contribution systems are
given in national currencies and as a proportion of average earnings.2 Parameter values in
national currencies are generally rounded to the nearest currency unit.
A summary results table gives relative pension levels, replacement rates, and pension
wealth at different individual levels of earnings. These are given in both gross and net
terms (the latter taking account of taxes and contributions paid when working and when
drawing the pension). Summary charts show the breakdown of the gross relative pension
value into the different components of the pension scheme (the first row of the figures). As
far as possible, the same terminology is used to describe these schemes as was set out in
Part I. Some standard abbreviations are used in the legends of the charts:
� SA: social assistance
� Targeted: separate resource-tested schemes for older people
� Minimum: a minimum pension within an earnings-related scheme
� Basic: a pension based only on number of years of coverage or residency
49
50 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
� Earnings-related: all public earnings-related programs, including notional accounts
and points schemes as well as traditional defined-benefit plans
� DC: defined-contribution, mandatory private plans
� Occupational: mandatory pensions, which can be provided by employers through
industrywide schemes (the Netherlands) and profession-based schemes (Sweden) or
can be provided publicly (Finland, France)
There are some retirement-income programs that are difficult to classify, including the
new savings credit in the United Kingdom, the government's flat-rate contribution to DC
plans in Mexico, the end-of-year scheme in Luxembourg, and the ATP scheme in Den-
mark. These programs are described in the relevant country chapters.
The second row of country figures shows the effect of personal income taxes and social
security contributions on relative pension values and replacement rates, giving the gross
and net values.
The figures use a standard scale to ease comparisons between countries: the scale for
replacement rates runs to 125 percent, while that for relative pension values runs to
2.5 times average earnings. In some cases, pension benefits exceed these maxima, and so
the measure has been capped at these levels.
The final row of country figures shows, for reference, the taxes and contributions paid
by pensioners and workers. This illustrates the source of any concessions to older people
in these systems since the values are shown for workers and pensioners with the same
income. The effect of taxes and contributions on net replacement rates is more complex
than illustrated here. Since replacement rates are usually less than 100 percent, the normal
progressivity of the tax system means that people tend to pay fewer taxes when retired
regardless of any concessions.
The final row also shows the sources of the net replacement rate. In addition to the compo-
nents of the pension system shown in the first row of charts, the sources include the effect of
taxes and contributions. The computation uses the results of the tax models on the amount of
taxes paid on earnings of a particular level and the amount of taxes due on the pension
entitlement calculated for someone earning at that level.
Notes
1. Note that the modeling relates to single, full-career workers drawing pension from the
normal eligibility age. Systems can (a) have complex rules for periods out of the labor mar-
ket (caring for children or in unemployment, for example); (b) treat married couples as a
single unit; or (c) adjust benefits for early and late retirement. Since these rules do not affect
the modeling under the current assumptions, they are described only briefly.
2. For the 30 OECD countries, these are the earnings of the average production worker,
as explained in Taxing Wages (OECD 2003). For other countries, average earnings are taken
from national sources.
10. High-Income OECD Countries
51
Australia
AUSTRALIA'S PENSION SYSTEM HAS TWO COMPONENTS: a means-tested age pension plus the
superannuation guarantee, a compulsory contribution to a private pension plan. These
plans are mainly defined-contribution plans.
Qualifying Conditions
The age pension is paid from age 65 for men. Women's pensionable age--currently 62.5--
will increase gradually to become 65 from 2013. The minimum age for withdrawing super-
annuation guarantee benefits is currently 55, increasing to 60 by 2025.
Benefit Calculation
Defined Contribution
The superannuation guarantee was introduced in 1992. It consists of a mandatory
employer contribution to a private pension plan. The mandatory contribution rate has
been 9 percent since 2002/03. Employers need not contribute for workers earning less than
A$ 450 a month (equivalent to A$ 5,400 a year or about 12 percent of average earnings).
There is also a limit to the earnings covered by the superannuation guarantee: employers
need not contribute for employees' pay above this threshold. For calendar 2002, this limit
was A$ 113,460 (calculated from a quarterly limit of A$ 27,510 for 2001/02 and A$ 29,220
for 2002/03). This limit--worth approximately 2.5 times average earnings--is indexed
to earnings. For comparison with other countries, the capital from the superannuation
guarantee is converted to a price-indexed annuity.
Targeted
The value of the age pension is adjusted biannually. The average for calendar 2002 gives
an annual benefit of A$ 10,984. The age pension's value is set to ensure that it does not fall
below 25 percent of pretax male average weekly earnings. The age pension is withdrawn
once income from other sources exceeds a threshold, known as the free area. The calendar
year figure for 2002 was A$ 2,964, approximately 7 percent of average earnings. The with-
drawal rate is 40 percent. There is also an asset test.
Personal Income Tax and Social Security Contributions
Older Australians are entitled to two additional tax concessions. The more generous credit
(the senior Australians tax offset) is available for those of pensionable age. This is A$ 2,230 for
singles since 2002 with income up to an income threshold of A$ 20,000 and is withdrawn
at a rate of 12.5 percent for income in excess of the threshold. The credit is nonrefundable;
it cannot create a negative tax liability. Taxpayers eligible for the senior Australians tax off-
set benefit from a higher value of the low-income Medicare levy threshold (A$ 20,500).
53
54 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
The superannuation guarantee has a complex tax treatment, with some tax extracted
at all three possible stages. A 15 percent tax is levied on employer contributions to the
fund. A superannuation surcharge is also applied to contributions for higher-income
workers. The maximum surcharge is 15 percent. The threshold where the superannuation
surcharge first applies is worth approximately 1.9 times average earnings, and the full
15 percent rate applies once earnings reach 2.3 times the average. Investment earnings of
the superannuation fund are taxed, again at 15 percent. Benefits are taxable at normal rates
on withdrawal but are subject to a 15 percent rebate. (However, the first A$ 1,000 does not
attract a rebate.)
There are no social security contributions in Australia.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 32.5 36.3 40.0 47.5 52.4 54.7
(% of average earnings)
Net pension level 42.6 47.5 52.4 59.2 62.3 64.0
(% of average net earnings)
Gross replacement rate 65.1 48.4 40.0 31.7 26.2 21.9
(% of individual earnings)
Net replacement rate 77.0 61.2 52.4 43.1 36.5 31.3
(% of individual net earnings)
Gross pension wealth 5.7 6.2 6.7 7.7 8.3 8.6
(multiple of average earnings) 6.7 7.2 7.8 8.9 9.6 10.0
Net pension wealth 7.5 8.1 8.8 9.6 9.9 10.1
(multiple of average net earnings) 8.8 9.5 10.2 11.1 11.5 11.7
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 55
Australia
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC targeted DC targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5
and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings
0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total pensioner: total taxes and contributions DC
targeted
Source: OECD pension models.
Austria
AUSTRIA HAS A DEFINED-BENEFIT PUBLIC scheme with an income-tested top-up for low-
income pensioners.
Qualifying Conditions
Normal pension age is 65 for men and 60 for women. There is a coverage condition:
180 months' (15 years') employment in the last 30 years or 300 months (25 years) during
the full lifetime. Alternatively, 180 months of contributions actually paid (as opposed to
coverage alone) are sufficient. Insured months are either contributory months (from
employment or voluntary contributions) or supplementary (credited months, known as
Ersatz-zeiten) for which only limited contributions are paid.
Benefit Calculation
Earnings-Related
The pension benefit currently accrues at 2.00% of earnings for each year of contributions,
but this will fall gradually, reaching 1.78 percent by 2009. The earnings measure is currently
the best 15 years' earnings. The valorization procedure is complex, although in practice
adjustments have been closer to price inflation than to earnings growth. The averaging
period is being extended; it will reach 40 years from 2028. Valorization under this new
procedure is still under discussion. The modeling takes this full-career measure and
assumes that earlier years' earnings are revalued in line with earnings growth.
Contributions are payable up to a ceiling of 39,240, approximately 175 percent of
average earnings.
In recent years, pensions in payment were adjusted in line with prices up to the
average pension; pensions above this threshold were increased by a flat amount, which
was equal to the absolute increase given to the average pensioner. This method was used
ad hoc, but it is not legally determined. Thus, adjustment of pensions in payment is dis-
cretionary. For the pension wealth calculations, the modeling assumes all pensions are
price indexed.
Targeted
There is a means-tested top-up (Ausgleichszulage) that ensures a minimum retirement
income of 631 per month for single people and 900 for a couple. There are 14 annual
payments. Again, adjustment of the safety-net income is discretionary; the modeling
implicitly assumes that it will rise in line with average earnings.
Personal Income Tax and Social Security Contributions
There are no special rules for pensioners. Pensioners are unable to claim the deduction for
work expenses if their only income is a pension.
56
HIGH-INCOME OECD COUNTRIES 57
There are no special reliefs for pension income.
Pensioners do not pay most social security contributions but do pay for sickness insurance.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 39.2 58.7 78.3 117.5 128.7 128.7
(% of average earnings) 37.0 52.1 69.4 104.1 114.1 114.1
Net pension level 52.9 74.2 93.2 130.1 139.3 139.3
(% of average net earnings) 50.0 67.4 84.6 117.7 127.3 127.3
Gross replacement rate 78.3 78.3 78.3 78.3 64.3 51.5
(% of individual earnings) 74.0 69.4 69.4 69.4 57.0 45.6
Net replacement rate 91.2 93.4 93.2 93.5 79.3 63.2
(% of individual net earnings) 86.1 84.8 84.6 84.6 72.5 57.8
Gross pension wealth 6.0 9.0 11.9 17.9 19.6 19.6
(multiple of average earnings) 7.6 10.7 14.2 21.4 23.4 23.4
Net pension wealth 8.1 11.3 14.2 19.8 21.2 21.2
(multiple of average net earnings) 10.3 13.8 17.4 24.1 26.1 26.1
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
58 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Austria
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related targeted earnings-related targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 2.5
levels
rates
2.0 2.0
pension
1.5 1.5
replacement
relative 1.0 1.0
gross
gross
0.5 0.5
and
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion
0 proportion
0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total pensioner: income tax targeted
Source: OECD pension models.
Belgium
BELGIUM HAS AN EARNINGS-RELATED PUBLIC SCHEME with a minimum pension and a
means-tested safety net.
Qualifying Conditions
The pension may be claimed at age 60 with 30 years' contributions. This condition will
increase to 35 years in 2005. Since a full-career worker will meet this condition, the model-
ing assumes that people draw the pension from age 60. Normal pensionable age is 65 for
men. For women, the eligibility age in 2002 was 62. It will increase to 63 in 2003, to 64 in
2006, and 65 in 2009.
Benefit Calculation
Earnings-Related
The full replacement rate for a single pensioner is 60 percent. For shorter contribution his-
tories, the pension is proportionally reduced. The earnings measure is average lifetime
pay. Earlier years' earnings are revalued in line with prices. There is a ceiling on pension-
able earnings of 39,368 for 2002 (approximately 125 percent of average earnings). This
ceiling was frozen between 1982 and 1999.
Pensions in payment are uprated in line with prices. There have also been discretionary
real increases, which have recently been very limited (either to the lowest or the longest-
running pensions).
Minimum
There is a minimum annual credit: annual earnings of less than 13,956 (equivalent to
approximately 45 percent of average earnings) are inflated to a minimum level. At least
15 years' insurance is necessary to qualify for the minimum credit. (This gives an effective
minimum pension for a full-career worker of 11,495 for a single person, worth 37 percent
of average earnings.)
The minimum earnings-related pension is 9,438 for a single person meeting the full
contribution condition. This is worth approximately 30 percent of average earnings. The
benefit value can be reduced proportionally for less-than-full careers, but only if the bene-
ficiary has a minimum of two-thirds of the full number of years. The minimum pension is
indexed to prices. Pensioners receive whichever is higher of the minimum pension and the
pension from the minimum annual credit.
Targeted
The safety-net income for the elderly is 7,163 for a pensioner living alone and 4,775 for
a pensioner living with others. Indexation is again to prices excluding certain goods.
59
60 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Personal Income Tax and Social Security Contributions
There are no special credits or allowances for pensioners. Pensions are taxable. There is an
additional tax reduction of 1,590 for a single person in receipt of pension income. This is
subject to restrictions based on the ratio of pension income to aggregate taxable income
(ATI) and on total ATI.
Pensioners with a pension above a threshold pay social security contributions of 3.55
percent for health and disability. However, the net pension may not fall below 1,023 per
month. There are also "solidarity" contributions of between 0.5 and 2.0 percent levied on
all pensions that exceed 13,401 per annum for single pensioners.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 30.8 30.8 37.3 47.9 47.9 47.9
(% of average earnings)
Net pension level 52.1 52.1 62.8 68.4 68.4 68.4
(% of average net earnings)
Gross replacement rate 61.6 41.1 37.3 31.9 23.9 19.2
(% of individual earnings)
Net replacement rate 82.7 63.8 62.8 50.6 40.6 34.2
(% of individual net earnings)
Gross pension wealth 5.5 5.5 7.3 9.4 9.4 9.4
(multiple of average earnings) 6.3 6.3 8.4 10.7 10.7 10.7
Net pension wealth 9.3 9.3 11.3 12.9 12.9 12.9
(multiple of average net earnings) 10.7 10.7 12.9 14.8 14.8 14.8
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 61
Belgium
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0
level rate 1.00
1.5 0.75
pension
1.0 replacement 0.50
relative
gross
0.5 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
SA SA
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 0.25
and
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
1.00
0.5 rate
income
0.4 0.75
and
0.3 replacement 0.50
net
earnings 0.2
of
of
0.25
0.1
0 proportion 0
proportion
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total pensioner: income tax minimum SA
Source: OECD pension models.
Note: SA = social assistance.
Canada
IN CANADA, UNIVERSAL, FLAT-RATE PENSION, KNOWN AS OLD-AGE SECURITY, can be topped
up with an income-tested benefit, known as the guaranteed income supplement. A tier of
earnings-related benefits is provided by the Canada Pension Plan and Qu�bec Pension
Plan. These two plans offer broadly similar benefits.
Qualifying Conditions
The basic pension is subject to a residency test, with 2.5 percent of the maximum pension
earned for each year of residence after age 18 up to a maximum of 40 years. A minimum of
10 years' residency is required to receive any benefit. It is payable from age 65. For the
earnings-related scheme, normal pension age is again 65, but an early pension may be
claimed from age 60.
Benefit Calculation
Basic
The average 2002 level of old-age security was C$ 5,320 (14 percent of average earnings).
The value of the basic pension is price indexed. This pension is subject to an income test
operated through the tax system. Once income exceeds C$ 56,968, the basic pension is
withdrawn at a 15 percent rate. This threshold, equivalent to just less than 1.5 times aver-
age earnings, is indexed to prices.
Targeted
The guaranteed income supplement gives a maximum pension, including the basic pen-
sion, which averaged C$ 11,600 in 2002 (30 percent of average earnings) for a single
person. This is withdrawn against income other than the basic pension at a 50 percent rate.
The benefit level is price indexed.
Earnings-Related
This scheme targets a 25 percent replacement rate based on average lifetime salary, with
earlier years' pay revalued in line with economywide earnings. The full benefit requires
40 years' contributions with proportional reductions for shorter work histories. The
maximum earnings-related pension for 2002 was C$ 779 a month (just under a quarter of
average earnings).
People earning less than C$ 3,500 a year (10 percent of average earnings) are not
required to contribute. There was a ceiling of C$ 39,100 in 2002 (just over average earn-
ings) on both contributions and benefits. The ceiling is indexed to prices, while the con-
tribution floor is frozen in nominal terms. The value of the earnings-related pension is
indexed to prices.
62
HIGH-INCOME OECD COUNTRIES 63
Personal Income Tax and Social Security Contributions
Under the personal income tax, an additional age credit of 16 percent on an amount of
C$ 3,728 in 2002 is available if total income is C$ 27,749 or less. The amount of age credit is
reduced at a rate of 15 percent of income in excess of C$ 27,749.
There is also a credit of 16 percent on the first C$ 1,000 of pension or annuity income.
Only pension income other than from the public schemes is eligible. Public pension
benefits are taxable, with the exception of the targeted scheme.
Social security contributions are not levied on pension income.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 36.2 39.3 42.5 42.5 42.5 42.5
(% of average earnings)
Net pension level 48.7 52.9 57.1 57.2 57.2 57.2
(% of average net earnings)
Gross replacement rate 72.4 52.4 42.5 28.4 21.3 17.0
(% of individual earnings)
Net replacement rate 89.4 67.6 57.1 39.5 30.6 25.1
(% of individual net earnings)
Gross pension wealth 5.5 6.0 6.5 6.5 6.5 6.5
(multiple of average earnings) 6.4 7.0 7.6 7.6 7.6 7.6
Net pension wealth 7.4 8.1 8.7 8.7 8.7 8.7
(multiple of average net earnings) 8.7 9.4 10.2 10.2 10.2 10.2
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
64 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Canada
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related basic earnings-related basic
targeted targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5
and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total basic targeted
Source: OECD pension models.
Denmark
DENMARK HAS A PUBLIC BASIC SCHEME with an income-tested supplement for low-income
pensioners. There are also two schemes based on individuals' contribution records, the
Arbeidsmarkedets Till�gspension (ATP) and SP, or special pension savings schemes.
Voluntary occupational schemes cover about 80 percent of the workforce.
Qualifying Conditions
The normal pension age is 65. A full state old-age pension requires 40 years' residence.
Shorter periods qualify for a prorated benefit (subject to a minimum of three years' resi-
dence).
Benefit Calculation
Basic
The full amount of the basic scheme is DKK 52,524 per year (17 percent of average earn-
ings). An earnings test reduces the benefit by 30 percent if pay exceeds DKK 223,200 per
year (approximately 75 percent of average earnings).
Targeted
The full supplement is DKK 52,872 per year for single people (approximately 17 percent of
average earnings). The benefit is tested against all sources of income except the basic pen-
sion. It is withdrawn at a rate of 30 percent once income exceeds DKK 49,200 a year for sin-
gle people (approximately 16 percent of average earnings). The basic amount and the
pension supplement are uprated annually in line with average earnings. If nominal earn-
ings growth exceeds 2 percent a year, up to 0.3 percentage points of the excess is put in
a reserve.
ATP
Two-thirds of the contributions for ATP are paid by employers and one-third by workers.
The contribution depends on hours worked (not earnings). A full-time employee in the
private sector paid DKK 2,684 in 2002. The contribution is adjusted sporadically; the mod-
eling assumes it increases in line with average earnings. A notional nominal interest rate of
1.5 percent is applied. However, ATP is a with-profit scheme: if actual returns exceed 1.5
percent, pensions are increased. The model assumes that the ATP earns the same interest
rate as defined-contribution schemes. Pensions in payment increase with prices if financial
conditions allow.
Defined Contribution
The contribution to the SP is 1 percent of earnings. If the accumulated balance is less
than DKK 15,000 at age 65, it is paid as a lump sum. If it is between DKK 15,000 and
DKK 120,000, then one-tenth of the balance is paid out in the first year, one-ninth the next
65
66 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
year, and so on. If the balance is more than DKK 120,000 at age 65, then the payments are
made monthly, with annual adjustments to reflect the market value of the account. There is
no ceiling on earnings covered by this scheme.
Personal Income Taxes and Social Security Contributions
There are no special tax allowances or credits for pensioners. Pensions are subject to
income tax. There are no special reliefs for pension income. The payment under a funded
pension scheme is subject to a tax of 40 percent on lump-sum withdrawals. Since 2001,
investment income of all types has been taxed at a 15 percent rate. Pensioners do not pay
social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 41.2 42.3 43.3 45.4 47.5 49.6
(% of average earnings)
Net pension level 51.9 53.0 54.1 56.4 58.7 60.9
(% of average net earnings)
Gross replacement rate 82.4 56.4 43.3 30.3 23.8 19.8
(% of individual earnings)
Net replacement rate 95.6 68.0 54.1 42.5 35.5 30.8
(% of individual net earnings)
Gross pension wealth 7.0 7.2 7.4 7.7 8.0 8.3
(multiple of average earnings) 8.1 8.2 8.4 8.7 9.0 9.3
Net pension wealth 7.5 7.7 7.8 8.2 8.5 8.8
(multiple of average net earnings) 10.2 10.3 10.5 10.8 11.2 11.5
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 67
Denmark
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC ATP DC ATP
basic targeted basic targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 0.25
and
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
1.00
rate
0.5
income 0.75
0.4
and
0.3 replacement 0.50
net
earnings 0.2 of
of 0.25
0.1
0 proportion 0
proportion 0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC ATP
pensioner: total basic targeted
Source: OECD pension models.
Finland
FINLAND'S TWO-TIER PENSION SYSTEM consists of the national state pension, which is
pension income tested, and a range of statutory earnings�related schemes with similar
rules. The schemes for private sector employees are partially prefunded, while the public
sector schemes are pay-as-you-go, financed with buffer funds.
Qualifying Conditions
The national pension is subject to a residency test (but no contribution requirements) and
is withdrawn against pension income from the earnings-related schemes. Both the
national and the earnings-related pensions are payable from age 65. The full benefit is
payable with 40 years' residence as an adult, with pro rata adjustments for shorter periods
of residence.
Benefit Calculation
Earnings-Related
From 2005, the accrual rate will be 1.5 percent of pensionable pay at ages 18�52, 1.9
percent at 53�62, and 4.5 percent at 63�67. For a full-career worker (20�65), the aggregate
accrual at the time of retirement will be 77.5 percent of pensionable earnings. The maximum
replacement rate of 60 percent is abolished from 2005. From that year, pensionable pay
will be based on career-average earnings, with earlier years revalued in line with a mix of
economywide earnings and prices: wage growth will have an 80 percent weight, and price
inflation, 20 percent. Pensionable pay is gross earnings less employees' pension contribu-
tions. A recently legislated change will reduce pension benefits from 2010 according to
increases in life expectancy from that date. The adjustment takes the form of an annuity
calculation using a discount rate of 2 percent per year. The adjustment expected in the
year 2040, based on the mortality projections, is to reduce benefits to 88.6 percent of their
value under the prereform rules. There is no contribution floor and no ceiling to contri-
butions or pensionable earnings. After retirement, the pension is uprated using a mix of
20 percent of earnings inflation and 80 percent of price inflation.
Targeted
The basic monthly benefit for a single pensioner in 2002 was between 467 and 488
(approximately a fifth of average earnings) depending on municipality. The pension is
reduced by 50 percent of the difference between other pension income and a disregard of
550 per year. The basic pension benefit and the parameters of the means test are uprated
annually in line with prices.
68
HIGH-INCOME OECD COUNTRIES 69
Personal Income Tax and Social Security Contributions
There are no special rules for the taxation of pensioners. Recipients of pension income may
deduct an allowance from their income subject to municipal income tax to a maximum of
6,540 for a single person in 2002. The allowance is withdrawn at a rate of 70 percent of
income above the full allowance. The allowance is "wasteable": the pension-income
allowance cannot exceed the amount of pension income.
Workers receive a deduction for work-related expenses, which is not available for pen-
sioners.
There are no contributions on pension income for pension or unemployment insurance.
From 2003, however, the same sickness-insurance contributions are levied on pensioners'
incomes as on those of workers. The sickness-insurance contribution is levied on taxable
income as defined in municipal taxation.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 38.0 47.5 63.3 95.0 126.6 158.3
(% of average earnings)
Net pension level 50.5 58.5 71.5 98.3 123.1 146.6
(% of average net earnings)
Gross replacement rate 75.9 63.3 63.3 63.3 63.3 63.3
(% of individual earnings)
Net replacement rate 87.3 73.1 71.5 71.8 71.3 71.9
(% of individual net earnings)
Gross pension wealth 5.9 7.5 10.0 14.9 19.9 24.9
(multiple of average earnings) 7.0 8.9 11.8 17.7 23.6 29.5
Net pension wealth 7.9 9.2 11.2 15.5 19.4 23.0
(multiple of average net earnings) 9.3 10.9 13.3 18.3 23.0 27.3
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
70 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Finland
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related targeted earnings-related targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 0.25
and
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total targeted
Source: OECD pension models.
France
FRANCE HAS A TWO-TIER SYSTEM, with an earnings-related public pension and mandatory
occupational schemes, based on a points system. The public scheme also has a minimum
pension.
Qualifying Conditions
A full state pension will require 40 years' contributions from 2008, compared with 37.5
years in 2002. The normal pension age is 60. The minimum pension has the same qualify-
ing conditions as the public, earnings-related scheme.
Benefit Calculation
Earnings-Related
The target replacement rate is 50 percent for a full career. For shorter contribution periods,
the target is reduced pro rata, with an additional penalty for missing years (or each year the
pension is drawn before age 65). The earnings measure is a number of best years, valorized
in line with prices. From 2008, pay will be averaged over 25 years. There is a ceiling on
eligible earnings, which in 2002 was 28,224, equivalent to approximately 125 percent of
average earnings. Benefits in payment are indexed to prices.
Minimum
The minimum pension was 525 per month in 2002 (a little under 30 percent of average
earnings). For the full benefit, 40 years of contributions are needed; the pension is prorated
for shorter periods. The value of the minimum pension is indexed to prices.
Mandatory Occupational
The ARRCO scheme covers the majority of private sector employees. The description
relates to noncadres. Benefits are earned on 6 percent of earnings up to the public pension
ceiling. Benefits are earned on 16 percent of pay, between one and three times the public
ceiling, giving an ARRCO ceiling of 84,672 (approximately 375 percent of average earn-
ings). Points earned each year are contributions divided by pension-point cost. At retire-
ment, accumulated points are converted into a pension by multiplying these by the
pension-point value. The calendar 2002 point value was 1.05, and the point cost, 11.00.
The current accord between the social partners (government, employers, and trade
unions), which is valid until 2008, increases the pension-point cost relative to earnings and
the pension-point value relative to prices. The modeling assumes that the increases will
remain.
Targeted
The minimum income for people aged 65 or over is 6,832 a year (approximately 30 per-
cent of average earnings). This income is adjusted in line with earnings. The 2003 reform
71
72 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
introduced a new objective: from 2008, full-career workers earning the minimum wage
(about 60 percent of average earnings) would receive a pension of at least 85 percent of the
net minimum wage. For 2002, the net minimum wage was 10,882.
Personal Income Tax and Social Security Contributions
There are no specific deductions for older people. There are no special reliefs for pension
income. Older people are not liable for standard social security contributions. However,
they pay the general social tax (CSG, contribution sociale generalis�e) of 6 percent. There is an
exemption for the lowest-income pensioners (depending on liability for the personal
income tax and the housing tax, taxe d'habitation), which means that some 40 percent of
older people do not pay CSG.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 42.1 42.1 49.4 70.9 88.0 105.2
(% of average earnings)
Net pension level 55.5 55.5 65.0 84.3 102.6 120.1
(% of average net earnings)
Gross replacement rate 70.1 56.1 49.4 47.3 44.0 42.1
(% of individual earnings)
Net replacement rate 84.2 70.8 65.0 58.7 55.3 53.4
(% of individual net earnings)
Gross pension wealth 7.6 7.6 8.9 12.8 15.9 18.9
(multiple of average earnings) 8.7 8.7 10.2 14.7 18.2 21.8
Net pension wealth 10.0 10.0 11.7 15.2 18.5 21.6
(multiple of average net earnings) 11.5 11.5 13.5 17.5 21.3 24.9
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 73
France
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
occupational earnings-related occupational earnings-related
minimum targeted minimum targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 0.25
and
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions occupational
pensioner: total pensioner: income tax earnings-related minimum targeted
Source: OECD pension models.
Germany
THE PUBLIC PENSION IN GERMANY HAS A SINGLE TIER, based on pension points. There is
also a social-assistance safety net.
Qualifying Conditions
The pension is payable from age 65 with five years' contributions and from age 63 with 35
years' contributions. Fewer than five years' contributions earn no benefit.
Benefit Calculation
Earnings-Related
A year's contribution at average earnings earns one point. Contributions are levied on
monthly earnings between 325 and 4,500 (2002 values). The floor and ceiling are equiva-
lent to 12 percent and 163 percent of average earnings, respectively. The ceiling also
applies to the number of points earned. Average covered earnings were 28,626 in 2002,
equivalent to 86 percent of the earnings of the average production worker in that year. The
sum of points at pension age is multiplied by a pension-point value, which was 25.31 in
the first half of 2002 and 25.86 in the second half of the year. The first three years' contri-
butions before age 25 are adjusted upward to the lesser of the two quantities: 75 percent of
total pension entitlement or 75 percent of lifetime-average pay. The pension-point value is
uprated annually in line with gross wages subject to an adjustment for increases in the
total contribution rate to the public scheme. The government aims to limit this rate to 22.0
percent. In 2002, the total contribution rate was 19.1 percent. In the long term, therefore,
the pension-point value will fall relative to real earnings. A further change in rules was
legislated in 2004 but has not been modeled. The sustainability factor will link the uprating
of the pension-point value to changes in the system-dependency ratio--that is, the ratio of
pensioners to contributors. Some parameters are slightly different in the new L�nder (the
federal states that made up the German Democratic Republic before reunification).
Social Assistance
The benefit value is determined regionally. The government pays the health and long-term
care contributions of older social-assistance recipients. There is also a supplement to cover
housing and fuel costs. Average total social-assistance receipt in the Western L�nder in 2002
was 648 per month.
Personal Income Tax and Social Security Contributions
There is no special relief for older people. Income up to a statutory line (the Existenzmini-
mum) is exempt from tax. This was 7,236 per person in 2002. This provision applies
equally to citizens of pension age and those of working age.
74
HIGH-INCOME OECD COUNTRIES 75
Some forms of pension income are taxed as if they were annuities. A part of the income
reflecting the (notional) repayment of capital is not taxable, while a part relating to the
(notional) interest on the capital is taxable. The taxable part covers the public pension, pri-
vately purchased annuities, and two types of occupational pension plans. The proportion
of the income subject to tax varies with the age at which the individual first started draw-
ing the pension. For retirement at age 65, only 27 percent of the pension is taxable. The
share at other illustrative ages is as follows: 38 percent at age 55, 32 percent at age 60, and
21 percent at age 70. There are additional deductions totaling 138 (102 plus 36) for
pensions drawn at any age.
Pensioners do not pay social security contributions on pension income for unemploy-
ment or pension insurance. However, pensioners pay half of the rate paid by workers for
sickness and long-term care, which, in 2002, were 7.00 percent and 0.85 percent, respectively.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 23.6 34.4 45.8 68.7 75.2 75.2
(% of average earnings)
Net pension level 37.0 53.8 71.8 107.7 117.8 117.8
(% of average net earnings)
Gross replacement rate 47.3 45.8 45.8 45.8 37.6 30.1
(% of individual earnings)
Net replacement rate 61.7 66.6 71.8 79.2 67.0 54.2
(% of individual net earnings)
Gross pension wealth 4.3 6.2 8.3 12.5 13.7 13.7
(multiple of average earnings) 5.1 7.4 9.8 14.8 16.2 16.2
Net pension wealth 6.7 9.8 13.0 19.6 21.4 21.4
(multiple of average net earnings) 8.0 11.6 15.4 23.1 25.3 25.3
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
76 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Germany
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related SA earnings-related SA
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setar 1.00
ent
pension
1.5 mecalper 0.75
relative 1.0 ss 0.50
gro
gross
0.5
and ndaten 0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
omecni etar
0.4
dna 0.75
sgnin 0.3 placementer 0.50
earfo 0.2 netfo
n n
0.25
0.1
proportio proportio
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total pensioner: income tax SA
Source: OECD pension models.
Greece
GREECE HAS AN EARNINGS-RELATED PUBLIC SCHEME, with two components plus a series of
minimum pensions and social safety nets. The system applies to labor-market entrants
from 1993.
Qualifying Conditions
Normal pensionable age is 65 for men and 60 for women, equalized at 65 for people
entering the labor force from 1993. A full pension requires a minimum of 4,500 days of con-
tributions (equivalent to approximately 15 years). Workers with 11,100 working days
(approximately 37 years) can retire on a full benefit regardless of age. An early pension is
payable from age 60 with the standard contribution requirement (of 4,500 days). There are
concessions for people who work in arduous or hazardous occupations and for women
with dependent or disabled children. The minimum social pension requires 15 years' con-
tributions. The safety-net programs--the social solidarity grant and social solidarity
benefit--pay benefits from age 60, subject to income tests as described below.
Benefit Calculation
Earnings-Related: Main Component
For labor-market entrants from 1993, the pension is 2 percent of earnings for each year of
contributions. The maximum insurance period is 35 years. The earnings measure is the aver-
age over the last five years before retirement. Earlier years' pay is valorized in line with the
increase in the pensions for public sector workers (see below). There is a maximum pension
of four times 1991 gross national product (GNP) per capita, linked to the evolution of civil
servants' pensions. For 2002, this cap on pension benefits was 2,144 per month. The calcu-
lations indicate that, for a full-career worker, this is equivalent to a ceiling on pensionable
earnings of 325 percent of average earnings. Adjustment of pensions in payment is discre-
tionary. In the past five years, pension increases have been progressive (larger increases for
smaller pensioners), with one exception. Given the lack of consistent practice in recent bene-
fit adjustments, pension wealth calculations are based on price indexation. All pensions have
14 "monthly" payments (with two bonus payments at different times in the year).
Earnings-Related: Supplementary Component
The full supplementary pension is 20 percent of the earnings measure under the main com-
ponent of the earnings-related scheme for workers with 35 years of contributions. The pen-
sion is proportionally reduced for shorter contribution periods, implying a linear accrual rate
of 0.57 percent. The value is increased by one-thirty-fifth for each year of contributions (300
days) beyond 35 years.
Minimum
The minimum pension is set as 70 percent of the minimum wage for a married, full-time
employee. For 2002, the value was 377 per month, equivalent to approximately 40 percent
77
78 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
of average earnings. This value is adjusted annually as part of the income policy. There are
additional income-tested, noncontributory schemes--the social solidarity grant and the
social solidarity benefit--as well as a scheme for the uninsured. These are not relevant to a
full-career worker.
Personal Income Tax and Social Security Contributions
There are no special reliefs for pensioners or for pension income. Pensioners do not pay
social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 42.0 63.0 84.0 126.0 168.0 210.0
(% of average earnings)
Net pension level 50.3 75.4 99.9 140.8 176.0 210.3
(% of average net earnings)
Gross replacement rate 84.0 84.0 84.0 84.0 84.0 84.0
(% of individual earnings)
Net replacement rate 99.9 99.9 99.9 99.9 99.9 99.9
(% of individual net earnings)
Gross pension wealth 6.3 9.4 12.6 18.9 25.2 31.5
(multiple of average earnings) 7.3 10.9 14.5 21.8 29.1 36.3
Net pension wealth 7.5 11.3 15.0 21.1 26.4 31.5
(multiple of average net earnings) 8.7 13.0 17.3 24.4 30.4 36.4
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 79
Greece
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
supplement earnings-related supplement earnings-related
targeted targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions supplement
pensioner: total earnings-related targeted
Source: OECD pension models.
Iceland
THE PUBLIC PENSION IN ICELAND HAS THREE COMPONENTS, a basic and two income-tested
schemes. There are also mandatory occupational pensions with a hybrid (albeit a mainly
defined-benefit) formula.
Qualifying Conditions
The normal pension age is 67. A full basic pension is earned with 40 years' residency. The
pension is proportionally reduced for shorter periods of residency, with a minimum
requirement of three years. The pension age is also 67 for members of private sector occu-
pational plans but is 65 for public sector workers.
Benefit Calculation
Basic
The full basic pension value is ISK 19,900 per month (approximately 9 percent of average
earnings). This benefit is income tested: withdrawal begins once income (from sources
other than the supplementary pension) exceeds ISK 1,296,060, equivalent to half of aver-
age earnings. The withdrawal rate is 30 percent. This income test applies only to nonpen-
sion income, such as earnings or capital income.
Targeted
A second element is the pension supplement, with a maximum value of ISK 34,372 per
month for a single person (16 percent of average earnings). This is withdrawn against
income above ISK 415,894 per year (approximately 16 percent of average earnings), but the
basic pension does not affect its value. The withdrawal rate for the income test in the pen-
sion supplement is 45 percent. Finally, there is an additional pension supplement with a
maximum entitlement of ISK 15,257 per month (just 7 percent of average earnings). The
supplement is withdrawn at a rate of two-thirds against all other income. All public bene-
fit levels are adjusted in line with public sector pay, (which is assumed to be the same as
economywide earnings growth).
Mandatory Occupational
The law requires schemes to target a replacement rate of 56 percent with 40 years' contri-
butions, giving an accrual rate of 1.4 percent for each year of service. Coverage is manda-
tory for people aged 16 to 70. The earnings base is average lifetime salary. There is no
ceiling on pensionable earnings. Occupational pensions in payment must, by law, increase
at least in line with consumer price inflation.
In practice, many schemes pay more than the legal minimum outlined above, typically
introducing a hybrid defined-contribution and defined-benefit element into the system.
There is a minimum contribution to occupational schemes of 10 percent of earnings.
Contributions above the level needed to finance the statutory benefits described above
80
HIGH-INCOME OECD COUNTRIES 81
may be either used to increase defined-benefit entitlements or diverted to individual
accounts, thus delivering a defined-contribution pension. However, the modeling covers
only the mandatory component and not these extrastatutory benefits (which are by no
means guaranteed).
Personal Income Tax and Social Security Contributions
Pensioners are taxed in the same way as people of working age: there are no additional
allowances. There is no specific relief for pension income. Pensioners do not pay social
security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 42.8 47.8 52.8 64.3 82.6 100.9
(% of average earnings)
Net pension level 57.1 61.5 65.9 76.0 92.0 108.1
(% of average net earnings)
Gross replacement rate 85.5 63.7 52.8 42.8 41.3 40.3
(% of individual earnings)
Net replacement rate 95.8 77.1 65.9 54.1 57.2 55.1
(% of individual net earnings)
Gross pension wealth 7.1 7.8 8.4 9.9 12.6 15.3
(multiple of average earnings) 8.1 8.8 9.4 11.1 14.1 17.2
Net pension wealth 9.5 10.0 10.5 11.7 14.0 16.4
(multiple of average net earnings) 10.8 11.3 11.8 13.1 15.8 18.4
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
82 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Iceland
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
occupational targeted occupational targeted
supplement supplement
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions occupational
pensioner: total targeted supplement
Source: OECD pension models.
Ireland
THE PUBLIC PENSION IN IRELAND IS A BASIC SCHEME paying a flat rate to all who meet the
contribution conditions. There is also a means-tested pension to provide a safety net for
the low-income elderly. Voluntary occupational pension schemes provide broad coverage
to approximately half of employees. (The government has a target to increase this pro-
portion to 70 percent.)
Qualifying Conditions
The old-age contributory pension is payable from age 66 while the retirement pension is
paid from age 65. Full entitlement to both benefits requires an average of 48 weeks' contri-
butions or credits per year throughout the working life. The pension value is proportion-
ally reduced for incomplete contribution histories. However, the old-age contributory
pension requires a minimum average of 10 weeks' contributions per year, and the retire-
ment pension, 24 weeks' per year. There is also a minimum total period of contributions of
260 weeks (equivalent to five years' full coverage).
The means-tested pension is payable from age 66.
Benefit Calculation
Basic
The values of the old-age contributory pension and the retirement pension are both
147.30 per week (paid for 53 weeks per year), which is approximately 30 percent of aver-
age earnings. There is an addition of 98.10 for a dependent adult of working age and
113.80 for a dependent age 66 or over. The value of the basic pension under a recent long-
term plan is fixed relative to earnings: the target rate is 34 percent of average earnings.
Targeted
The maximum value of the means-tested benefit is 134 per week for a single person with
an extra 88.50 for an adult dependent. The single person's benefit is worth 28 percent of
average earnings. There is a small disregard in the means test. Otherwise, the benefit is
withdrawn at 100 percent of income. There is also an assets test, which converts capital of
more than 20,315 to income using a standard formula.
The value of the target safety-net income in the means-tested scheme broadly follows
the uprating of the basic schemes (it is linked to earnings).
Personal Income Tax and Social Security Contributions
There is an additional tax credit for single people over 65 of 205. This is on top of the
general credit, which was 1,520 per person in 2002. Over 65s are also entitled to a much
higher exemption limit (below which no tax is paid). Single people over 65 have an
83
84 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
exemption of 13,000 compared with the general exemption of 5,210. There are no spe-
cial rules regarding the taxation of pension income. Pensioners are not liable for social
security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 30.6 30.6 30.6 30.6 30.6 30.6
(% of average earnings)
Net pension level 36.6 36.6 36.6 36.6 36.6 36.6
(% of average net earnings)
Gross replacement rate 61.3 40.9 30.6 20.4 15.3 12.3
(% of individual earnings)
Net replacement rate 63.0 47.0 36.6 27.4 21.9 18.3
(% of individual net earnings)
Gross pension wealth 5.4 5.4 5.4 5.4 5.4 5.4
(multiple of average earnings) 6.5 6.5 6.5 6.5 6.5 6.5
Net pension wealth 6.5 6.5 6.5 6.5 6.5 6.5
(multiple of average net earnings) 7.7 7.7 7.7 7.7 7.7 7.7
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 85
Ireland
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
basic basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates
1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions basic
pensioner: total
Source: OECD pension models.
Italy
THE NEW ITALIAN PENSION SYSTEM is based on notional accounts. Contributions earn a rate
of return related to GDP growth. Benefits are a function of accumulated notional capital
and an actuarial factor, which takes account of average life expectancy at retirement. The
new system applies in full to labor-market entrants from 1996 onward.
Qualifying Conditions
The normal pension age under the new system will be 65, but it will be possible to draw
the pension from age 57, subject to five years' contributions. However, the pension value
must also be worth at least 1.2 times the social-assistance pension. The modeling assumes
that people retire at age 65.
Benefit Calculation
Earnings-Related
Notional accounts are credited with 33 percent of earnings, slightly more than actual con-
tributions. The notional interest rate is a five-year moving average of GDP growth. Given
the projected decline in the Italian labor force and a baseline assumption of 2 percent real
wage growth, real GDP should grow at 1.6 percent per year. The resulting notional capital
is multiplied by a transformation coefficient at retirement, which varies with the age at which
the pension is claimed. The values are reviewed every 10 years on the basis of evidence of
mortality rates at different ages and assuming a real discount rate of 1.5 percent. Minimum
pay for contribution purposes is 152 per week (37 percent of average earnings). Maxi-
mum earnings are 76,443 per year (nearly 360 percent of average earnings). The indexa-
tion of pensions in payment is complex. For benefits up to three times the minimum
pension, there is full price indexation. This threshold is 1,178 (approximately two-thirds
of average earnings). Between three and five times the minimum pension, uprating is 90
percent of price inflation. Above this threshold, uprating falls to 75 percent of prices.
Social Assistance
The minimum pension is abolished for people covered only under the new system (that is,
entrants in 1996 and after). However, pensioners with incomes below the social-assistance
level can claim a benefit from age 65, subject to a means test. The 2002 value of social assis-
tance (assegno sociale), including supplements, was 4,725 (364 a month). There is a
higher benefit of 6,714 for individuals over 70.
Personal Income Tax and Social Security Contributions
In addition to standard reliefs, pensioners with no other income received tax credits as set
out in the 2002 schedule below:
86
HIGH-INCOME OECD COUNTRIES 87
Income (lower limit) 4,855 9,296 9,554 9,813
Age < 75 98 62
Age > 75 222 186 93 46
Private pension incomes are only partially taxable: 87.5 percent of benefits are taxable
for occupational pension schemes and 60.0 percent for personal pension plans. Social secu-
rity contributions are not levied on pension income.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 39.4 59.1 78.8 118.2 157.6 197.0
(% of average earnings)
Net pension level 49.1 69.3 88.8 125.2 159.7 192.0
(% of average net earnings)
Gross replacement rate 78.8 78.8 78.8 78.8 78.8 78.8
(% of individual earnings)
Net replacement rate 89.3 88.0 88.8 88.4 89.1 89.0
(% of individual net earnings)
Gross pension wealth 5.8 8.7 11.4 16.5 22.0 27.5
(multiple of average earnings) 6.9 10.4 13.5 19.4 25.9 32.4
Net pension wealth 7.2 10.2 12.8 17.5 22.3 26.8
(multiple of average net earnings) 8.6 12.2 15.2 20.6 26.3 31.6
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
88 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Italy
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related earnings-related
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total
Source: OECD pension models.
Japan
THE JAPANESE PUBLIC PENSION SYSTEM HAS TWO TIERS: a basic, flat-rate scheme and an
earnings-related plan.
Qualifying Conditions
The old-age, basic pension is paid from age 65 with a minimum of 25 years' contributions.
However, reduced benefits may be received from age 60. The earnings-related pension is
paid in addition to basic pension with a minimum of one month's contribution, provided
a pensioner is entitled to the basic pension. The pension age under this program is gradu-
ally being increased from 60 years to 65 for men in 2025 and for women in 2030.
Benefit Calculation
Basic
The full basic pension for 2002 was JPY 804,200 per year, corresponding to 19 percent of
average earnings. Average receipt of the basic pension is approximately JPY 620,000 per
year. The value of the basic pension is price indexed.
Earnings-Related
The employees' pension scheme has a flat rate and an earnings-related component. The
most important part is the earnings-related pension. The accrual rate was 0.7500 percent of
lifetime average earnings, gradually falling to 0.7125 percent. Past earnings are valorized
in line with average earnings. There is a ceiling on earnings applied to calculate contribu-
tions; it is set at JPY 620,000 a month, equivalent to 175 percent of average earnings.
The flat-rate benefit amounts to JPY 1,676 per month of contributions. This is paid only
to pensioners aged between 60 and 64 years. As the model assumes retirement at 65, this
component is not included.
The employees' pension in payment is price indexed.
Personal Income Tax and Social Security Contributions
There is an additional JPY 500,000 deduction for over 65s if their income is less than
JPY 10 million in total.
There is a schedule of deductions for over 65s, beginning with 100 percent of the first
JPY 1 million of income from the public pension scheme (or from a particular type of pri-
vate pension scheme such as a tax-qualified retirement plan). Next, 25 percent of income
up to JPY 3.6 million is deductible, followed by 15 percent of income up to JPY 7.2 million,
and 5 percent thereafter. Finally, the deduction is subject to a minimum of JPY 1.4 million.
There are no special rules for the taxation of pension income.
Contributions to health insurance and elderly care insurance are levied on pension
income.
89
90 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 34.6 42.4 50.3 65.9 73.7 73.7
(% of average earnings)
Net pension level 40.9 50.2 59.1 76.1 84.5 84.5
(% of average net earnings)
Gross replacement rate 69.2 56.6 50.3 44.0 36.9 29.5
(% of individual earnings)
Net replacement rate 80.1 66.3 59.1 51.9 44.3 35.8
(% of individual net earnings)
Gross pension wealth 5.7 7.0 8.3 10.9 12.2 12.2
(multiple of average earnings) 6.5 7.9 9.4 12.3 13.8 13.8
Net pension wealth 6.8 8.3 9.8 12.6 14.0 14.0
(multiple of average net earnings) 7.6 9.4 11.0 14.2 15.8 15.8
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 91
Japan
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related basic earnings-related basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total pensioner: income tax basic
Source: OECD pension models.
Republic of Korea
THE KOREAN PUBLIC PENSION SCHEME was introduced relatively recently. It is an earnings-
related scheme with a progressive formula: benefits are based on both individual and
economywide average earnings.
Qualifying Conditions
The pension is available from age 60 provided the individual has contributed for 10 years
or more. An actuarially reduced early pension can be drawn from age 55.
Benefit Calculation
Earnings-Related
The scheme is earnings related. Benefits accrue at the rate of 1.5 percent of earnings per
year of membership up to a maximum replacement rate of 100 percent. Earlier years' earn-
ings are valorized in line with average earnings. The earnings measure used in the formula
is the average of individual lifetime-average earnings and economywide average pay
(measured over the previous three years).
The component of pension based on individual earnings and the part based on average
earnings are shown separately in the charts since the part based on economywide average
earnings is akin to basic schemes operated in other countries.
There is a ceiling to pensionable pay of KRW 3.6 million per month, which is equivalent
to double average earnings.
The benefit is indexed to prices after retirement.
Personal Income Tax and Social Security Contributions
Pensioners receive an additional allowance of KRW 0.5 million on top of the standard
allowance of KRW 1 million.
Pension income is taxable. There is a pension-income deduction, the thresholds of
which are half of those that apply to workers. Below KRW 2.5 million, all income is
deductible. Above that level, the marginal rate of deduction falls to 40 percent, 20 percent,
and, finally, 10 percent as shown below:
Lower limit (KRW million) 0 2.5 5 9
Deduction (KRW million) total amount 2.5 3.5 4.3
Marginal deduction (%) 100 40 20 10
Pensioners do not pay social security contributions.
92
HIGH-INCOME OECD COUNTRIES 93
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 43.9 51.2 58.5 73.1 84.5 84.5
(% of average earnings)
Net pension level 47.7 55.3 63.0 78.2 89.8 89.8
(% of average net earnings)
Gross replacement rate 87.8 68.3 58.5 48.8 42.2 33.8
(% of individual earnings)
Net replacement rate 93.4 73.0 63.0 54.2 48.3 39.6
(% of individual net earnings)
Gross pension wealth 7.2 8.4 9.6 12.0 13.9 13.9
(multiple of average earnings) 8.5 9.9 11.3 14.2 16.4 16.4
Net pension wealth 7.9 9.1 10.4 12.9 14.8 14.8
(multiple of average net earnings) 9.2 10.7 12.2 15.1 17.4 17.4
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
94 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Korea
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related basic earnings-related basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates
1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total basic
Source: OECD pension models.
Luxembourg
THE PUBLIC PENSION SCHEME IN LUXEMBOURG HAS TWO COMPONENTS: a flat-rate part contin-
gent on years of coverage and an earnings-related part. There is also a minimum pension.
Qualifying Conditions
The pension is payable from age 57 with 40 years' (compulsory or voluntary) contributions.
With 40 years of compulsory, voluntary, or credited contributions, it is paid from age 60.
Otherwise, pension age is 65 (with at least 10 years' contributions).
Benefit Calculation
Basic
The basic pension was worth 311 per month in March 2002, subject to 40 years' coverage
(approximately 12 percent of average earnings). For incomplete insurance, the benefit is
proportionally reduced. There is also an end-of-year allowance, which adds 42 per month
to the pension for 40 years' contributions. This is proportionally reduced for insurance
periods under 40 years, implying a little over 1 per month for each year covered. The
end-of-year allowance is indexed to nominal earnings.
Earnings-Related
The accrual rate is 1.85 percent per year. The earnings measure is the lifetime average
revalued in line with average earnings. The accrual rate is higher for older workers and
longer contribution periods. Each year of work after age 55 increases the accrual rate by
0.01 percentage points, as does each year of contributions above 38. The maximum accrual
rate is 2.05 percent. The maximum pension in March 2002 was 5,513 per month (just
above twice the average earnings). Benefits are indexed to prices and additional adjust-
ments to real wages are considered every two years. Recently, increases have kept pace
with the growth of average earnings; the modeling assumes that this scenario continues.
Minimum
The minimum pension is 1,191 per month for 40 years' coverage (equivalent to 46 percent
of average earnings). The amount is proportionally reduced for shorter periods, subject to a
minimum 20 years of service periods (compulsory, voluntary, or credited contributions).
Social Assistance
The social-assistance safety-net level is 942 per month for a single person.
Personal Income Tax and Social Security Contributions
Pensioners receive a deduction for professional expenses of a minimum of 300 (com-
pared with 540 for people of working age). Pensioners do not receive the travel expenses
deduction (a minimum of 396 for workers) or the special deduction (600 for workers).
95
96 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
There are no special tax reliefs for pension income. Pensioners pay 2.65 percent sickness
contributions on their gross income plus about 1.00 percent for long-term care insurance.
This compares with 4.95 percent sickness contributions for employees (and the same 1.00
percent for long-term care). Pensioners also contribute to the unemployment-insurance
scheme through a 2.50 percent solidarity surcharge on their central government income
tax liabilities. However, they do not contribute to the pension scheme.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 57.7 79.8 101.9 146.2 190.4 224.5
(% of average earnings)
Net pension level 68.6 90.4 109.8 145.2 178.8 205.9
(% of average net earnings)
Gross replacement rate 115.5 106.5 101.9 97.4 95.2 89.8
(% of individual earnings)
Net replacement rate 125.0 115.0 109.8 105.6 104.2 100.1
(% of individual net earnings)
Gross pension wealth 10.3 14.3 18.3 26.2 34.1 40.2
(multiple of average earnings) 12.8 17.7 22.6 32.3 42.1 49.7
Net pension wealth 12.3 16.2 19.7 26.0 32.0 36.9
(multiple of average net earnings) 15.2 20.0 24.3 32.1 39.6 45.6
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 97
Luxembourg
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5
individual earnings, proportion of average individual earnings, proportion of average
earnings-related end-of-year earnings-related end-of-year
basic SA basic SA
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total pensioner: income tax end-of-year basic SA
Source: OECD pension models.
The Netherlands
THE DUTCH PENSION SYSTEM HAS TWO MAIN TIERS, consisting of a flat-rate public scheme
and earnings-related occupational plans. Although there is no statutory obligation for
employers to offer a pension scheme to their employees, industrial relations agreements
mean that 91 percent of employees are covered.
Qualifying Conditions
The basic pension is payable from age 65. Normal retirement age is also typically 65 in
occupational plans.
Benefit Calculation
Basic
For a single person, the gross benefit in 2002 was 11,013 (just over a third of average earnings).
Its value is uprated biannually in line with the net minimum wage. The social-assistance
benefit for older people is equal to the net basic pension.
Quasi-mandatory Occupational
The Netherlands also has a private pension system with broad coverage. More than 90
percent of its members are covered by defined-benefit schemes. Of these, approximately
two-thirds use an average salary measure of earnings in the benefit formula, while the rest
use a final salary measure. There is no ceiling to pensionable earnings.
There is no statutory requirement for entry ages for occupational plans. In 2003, a little
over half of the employees were in schemes with no entry age, 6 percent in schemes with
an entry age of 16�20, 15 percent with 21�24, and 23 percent with entry age 25. Most final-
salary schemes give 1.75 percent of those earnings for each year of service, implying a
replacement rate of 70 percent after a complete 40-year career. Average-salary plans typi-
cally have an accrual rate of 2.25 percent for each year of service.
There are no legal requirements for valorization of earlier years' pay; thus, practice
varies. Some schemes valorize with average earnings; others use the index for uprating
pensions in payment. Since the latter is also typically average earnings, the modeling
assumes an average-salary scheme with valorization to average earnings. Benefits in pay-
ment are typically indexed to earnings (more than half of the members are covered in such
schemes), although there is no legal uprating requirement.
Occupational pensions are integrated with the public pension system. The current tax
rules allow a maximum benefit of 100 percent of final pay at age 65 from both public and
private systems. Most schemes have a target total replacement rate of 70 percent of final
pay, so private benefits are reduced by an amount approximately equal to the value of the
public pension entitlement, a process known as franchising.
98
HIGH-INCOME OECD COUNTRIES 99
Personal Income Tax and Social Security Contributions
The basic tax credit for over 65s is 737. This tax credit is increased by 289 for incomes
less than 28,563. Single people with incomes below 28,563 receive an additional tax
credit of 256. There are no special allowances for pension income.
Pensioners pay 11.5 percent of pension income for general health insurance and
survivor's pensions. Depending on their income, they pay for their own health insurance.
The social security contributions are less than the contributions for employees (who also
pay for old-age pensions, unemployment, and so on).
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 34.3 51.2 68.3 102.4 136.5 170.6
(% of average earnings)
Net pension level 46.4 66.3 84.1 118.8 144.7 170.3
(% of average net earnings)
Gross replacement rate 68.7 68.3 68.3 68.3 68.3 68.3
(% of individual earnings)
Net replacement rate 82.5 88.2 84.1 85.8 83.8 82.8
(% of individual net earnings)
Gross pension wealth 5.2 7.7 10.3 15.5 20.6 25.8
(multiple of average earnings) 5.9 8.9 11.8 17.7 23.6 29.5
Net pension wealth 7.0 10.0 12.7 18.0 21.9 25.7
(multiple of average net earnings) 8.0 11.5 14.6 20.6 25.1 29.5
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
100 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
The Netherlands
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
occupational basic occupational basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions occupational
pensioner: total pensioner: income tax basic
Source: OECD pension models.
New Zealand
THE PUBLIC PENSION IN NEW ZEALAND IS A FLAT RATE, subject to a residency test.
Qualifying Conditions
Ten years' residency since the age of 20 (including five years' after age 50) entitles people
to the public pension at 65 years of age.
Benefit Calculation
Basic
The pension in 2002 for a single person living alone was NZ$ 288 gross per week, which is
approximately 38 percent of average earnings. The value is a little lower for people shar-
ing accommodation. It is NZ$ 437 gross per week for married pensioner couples, equiva-
lent to 58 percent of average earnings.
The rates of public pensions are linked by law to average earnings, with the net couple
rate being set between 65.0 and 72.5 percent of the net average wage, depending on move-
ments in prices. The rates for single people are set at 65.0 percent (living alone) and 60.0
percent (sharing) of the couple rate.
Personal Income Tax and Social Security Contributions
New Zealand does not provide any tax concessions specifically for older people.
The public pension is subject to personal income tax (in the same manner as any other
personal income). Note that the calculations for the worker tax differ slightly from those
reported in the OECD's Taxing Wages (OECD 2003). For workers, these include the 1.2
percent accident compensation corporation levy, which is not paid by pensioners. Thus,
people of working age pay a slightly higher average effective tax rate than do pensioners.
The New Zealand system is funded through general taxation and not specific social
security contributions.
101
102 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 37.6 37.6 37.6 37.6 37.6 37.6
(% of average earnings)
Net pension level 39.5 39.5 39.5 39.5 39.5 39.5
(% of average net earnings)
Gross replacement rate 75.1 50.1 37.6 25.0 18.8 15.0
(% of individual earnings)
Net replacement rate 77.1 52.0 39.5 27.9 22.0 18.1
(% of individual net earnings)
Gross pension wealth 5.7 5.7 5.7 5.7 5.7 5.7
(multiple of average earnings) 6.5 6.5 6.5 6.5 6.5 6.5
Net pension wealth 6.0 6.0 6.0 6.0 6.0 6.0
(multiple of average net earnings) 6.9 6.9 6.9 6.9 6.9 6.9
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 103
New Zealand
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
basic basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement
0.50
earnings net
0.2
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total pensioner: total taxes and contributions basic
Source: OECD pension models.
Norway
THE PUBLIC PENSION SYSTEM IN NORWAY CONSISTS OF A FLAT-RATE, basic pension and an
earnings-related scheme. People with small earnings-related pensions receive an income-
tested supplement.
Qualifying Conditions
The normal pension age is 67. Forty years' insurance is required to receive the full pension,
both basic and earnings-related benefits. Both benefits are proportionally reduced for
shorter insurance histories. A minimum of three years of contributions is required to
receive an earnings-related pension.
Benefit Calculation
Basic
Benefits are determined in relation to a basic amount, G, that was NOK 53,233 (on average)
in 2002. The full basic pension for a single pensioner equals the basic amount (approxi-
mately 18 percent of average earnings). There is no formal indexation procedure for the
value of the basic amount or pension. Although past increases were below earnings
growth, in recent years the government has agreed to increase the basic pension in line
with average earnings. The modeling assumes that this continues.
Earnings-Related
Since the basic pension replaces the first slice of earnings, the earnings-related scheme
covers pay only above the basic amount. The earnings-related scheme has a progressive
formula: the replacement rate falls for higher earnings. Annual earnings between 2.89 and
6.00 times the basic amount are replaced at a 42 percent rate. From 6.00 to 12.00 times the
basic amount, the replacement rate is one-third of that level (that is, 14 percent). Given that
40 years' contributions are needed for a full pension, these are equivalent to annual accrual
rates of 1.05 and 0.35 percent, respectively. The first threshold, where the accrual rate
declines, is a little over average earnings (109 percent). The ceiling on earnings eligible for
benefits is therefore a little over double average earnings (219 percent). The calculation of
the pension uses the best 20 years of earnings. It is specified as a points system.
Targeted
The special supplement is 79.33 percent of the basic amount, giving a total minimum pen-
sion for a single pensioner of 1.7933 times the basic amount, NOK 95,463, which is equiva-
lent to approximately a third of average earnings.
104
HIGH-INCOME OECD COUNTRIES 105
Personal Income Tax and Social Security Contributions
The age deduction provided an additional allowance of NOK 18,360 in 2002. There is also
a separate tax-limitation rule for pensioners. Approximately half the people receiving
benefits or pensions either pay no tax or do so under the limitation rule. The additional
allowance cannot be used along with the tax-limitation rule. As a result of the tax-limitation
rule, pensions below NOK 105,325 in 2002 are not subject to income tax or social security
contributions.
Pension income is liable for social security contribution at a lower rate (3.0 percent) than
employees' wage earnings (7.8 percent). The social security contribution is not a part of the
tax-limitation rule.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 32.7 42.1 52.6 69.8 76.8 79.4
(% of average earnings)
Net pension level 45.9 56.6 65.1 80.0 86.8 89.3
(% of average net earnings)
Gross replacement rate 65.3 56.1 52.6 46.5 38.4 31.8
(% of individual earnings)
Net replacement rate 85.5 73.1 65.1 58.2 50.1 42.8
(% of individual net earnings)
Gross pension wealth 5.3 6.7 8.2 10.7 11.7 12.1
(multiple of average earnings) 6.2 7.7 9.5 12.4 13.5 14.0
Net pension wealth 7.4 9.0 10.1 12.2 13.2 13.6
(multiple of average net earnings) 8.7 10.4 11.7 14.2 15.3 15.7
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
106 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Norway
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0
replacement 0.50
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related basic earnings-related basic
targeted targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total pensioner: income tax basic targeted
Source: OECD pension models.
Portugal
PORTUGAL HAS AN EARNINGS-RELATED PUBLIC pension scheme with a means-tested safety net.
Qualifying Conditions
The standard pension age is 65 although early retirement is possible from age 55. A mini-
mum of 15 years of contributions is also required for retirement at 65. Early retirement is
possible with 30 years of contributions.
Benefit Calculation
Earnings-Related
The pension accrues at 2 percent of the earnings base for each year of contributions for 20
or fewer years' contributions. For beneficiaries with 21 or more years of contributions, the
accrual rate ranges between 2.0 and 2.3 percent, depending on earnings. The schedule for
the accrual rate depends on individual earnings relative to the value of the national mini-
mum wage.
Earnings/minimum wage < 1.1 1.1 2.0 4.0 8.0
Accrual rate (%) 2.3 2.25 2.2 2.1 2.0
Pension accrues for a maximum of 40 years. The earnings measure is presently the best 10
of the final 15 years. However, this base is currently being extended so that it will reach
lifetime-average earnings from 2017. Valorization of earnings from the beginning of 2002 is
a mix of earnings and prices. The weights are 75 percent price inflation and 25 percent
earnings growth, subject to a maximum real increase of 0.5 percent. Pensions in payment
are indexed to prices.
Minimum
There is a minimum pension of 190 (for workers with up to 15 years of contributions).
For workers with 15 to 40 years, the amount of the minimum pension varies between 65
and 100 percent of the minimum wage, net of employees' social contributions. For 2002,
the minimum pension was between 201 and 310. There are 14 "monthly" payments a
year (including two bonuses).
Targeted
For people who do not qualify for the earnings-related scheme, the social pension was
138 per month in 2002. This is only paid if total income for a single person does not
exceed 30 percent of the minimum wage. The social pension is payable from age 65.
Although there is no formal indexation procedure for the social pension, increases have
usually been above inflation. The government has a target for the social pension of half the
107
108 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
minimum wage, net of employees' social security contributions, which it expects to
achieve gradually. Again, there are 14 "monthly" payments.
Personal Income Tax and Social Security Contributions
There are no special reliefs beyond the general allowance for all taxpayers. However, there
is an additional allowance for disabled people. There are no special reliefs for pension
income. Pensions are exempt from social contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 51.6 51.6 66.7 98.9 131.1 161.8
(% of average earnings)
Net pension level 61.7 61.7 79.8 118.4 154.5 186.4
(% of average net earnings)
Gross replacement rate 103.1 68.8 66.7 65.9 65.5 64.7
(% of individual earnings)
Net replacement rate 115.9 79.8 79.8 84.4 86.3 86.9
(% of individual net earnings)
Gross pension wealth 7.9 7.9 10.2 15.1 20.0 24.7
(multiple of average earnings) 9.2 9.2 12.0 17.7 23.5 29.0
Net pension wealth 9.4 9.4 12.2 18.1 23.6 28.5
(multiple of average net earnings) 11.1 11.1 14.3 21.2 27.7 33.4
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 109
Portugal
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates
1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
etar
income 0.4
0.75
and
0.3
placementer 0.50
earnings 0.2
of netfo
n
0.25
0.1
proportion proportio
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: OECD pension models.
Spain
THE SPANISH PUBLIC PENSION SYSTEM CONSISTS OF A SINGLE, earnings-related benefit. There
is also a means-tested minimum pension, which replaces the previous special social-assis-
tance scheme.
Qualifying Conditions
The retirement age for a full benefit is 65 years for men and women. Fifteen years of con-
tributions are necessary to qualify for a pension benefit.
Benefit Calculation
Earnings-Related
The benefit accrues according to a schedule. After 15 years' contributions, it is 50 percent
of the earnings base. Over the next 10 years, an extra 3 percent is accrued per year, fol-
lowed by 2 percent per year thereafter. The maximum accrual is 100 percent, reached after
35 years' contributions.
The earnings base equals pay over the last 15 years that is uprated in line with prices.
However, there is no adjustment for price inflation in the last two years before retirement.
This means that the replacement rate relative to final salary is less than 100 percent. On the
standard assumptions for earnings growth and price inflation, the replacement rate is cal-
culated to be 88 percent. There is a ceiling on earnings for contributions and benefit pur-
poses of 30,899, or 191 percent of average earnings.
Benefits are price indexed.
Minimum
There is a minimum pension payable from age 65 amounting to 393 per month. There are
14 payments per year.
Personal Income Tax and Social Security Contributions
There are no special rules for the taxation of pensioners. There are no special allowances
for pension income. Social security contributions are not levied on pension income.
110
HIGH-INCOME OECD COUNTRIES 111
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 40.6 60.9 81.2 121.8 153.3 153.3
(% of average earnings)
Net pension level 49.9 69.9 88.3 126.0 154.1 154.1
(% of average net earnings)
Gross replacement rate 81.2 81.2 81.2 81.2 76.7 61.3
(% of individual earnings)
Net replacement rate 88.7 89.4 88.3 88.4 83.4 68.8
(% of individual net earnings)
Gross pension wealth 6.1 9.1 12.2 18.3 23.0 23.0
(multiple of average earnings) 7.1 10.7 14.3 21.4 26.9 26.9
Net pension wealth 7.5 10.5 13.2 18.9 23.1 23.1
(multiple of average net earnings) 8.8 12.3 15.5 22.1 27.1 27.1
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
112 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Spain
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related targeted earnings-related targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setartn 1.00
pension 1.5 0.75
placemeer
relative 1.0 0.50
ossrg
gross
0.5
and dnaten 0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
e
m etar
ncoi 0.4
0.75
and
gsninrae 0.3
placementer 0.50
0.2
of netfo
n
onitroporp 0.25
0.1
proportio
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total targeted
Source: OECD pension models.
Sweden
THE EARNINGS-RELATED PART OF THE NEW PENSION SYSTEM IS BASED ON NOTIONAL
ACCOUNTS. There is a small mandatory contribution to defined-contribution pensions and
an income-tested top-up. Occupational pension plans--with defined-benefit and defined-
contribution elements--have broad coverage.
Qualifying Conditions
Eligibility for the guarantee pension is earned with three years' residency. The maximum
pension requires 40 years' residency and is reduced proportionally for shorter periods.
The standard pension age for occupational plans is 65 with an early pension age of 55 and
an entry age of 28. The earnings-related, public pension may be claimed from age 61.
Benefit Calculation
Earnings-Related
Contributions to notional accounts are 16 percent of pensionable pay and are uprated in
line with a three-year moving average of economywide earnings. Pensionable pay is earn-
ings net of employee contributions (7 percent), giving an effective contribution rate on
gross earnings of 14.88 percent. Contributions were levied when earnings exceeded a floor
of SEK 11,310 in 2002 (less than 5 percent of average earnings). There was a ceiling on pen-
sionable earnings of SEK 291,000 in 2002. At retirement, notional capital is converted to an
annuity using a coefficient dependent on retirement age and life expectancy (from the pre-
vious five years' unisex mortality table). A discount rate of 1.6 percent a year is assumed.
After retirement, pensions are normally uprated with average earnings less 1.6 percent.
Targeted
The guarantee pension is an income-tested top-up with a full benefit in 2002 of SEK 80,727
(approximately a third of average earnings). It is withdrawn at 100 percent against the first
SEK 47,754 (2002) of income from the earnings-related pension, and thereafter at 48 per-
cent. This threshold is equivalent to 20 percent of average earnings. The guarantee level is
price indexed.
Defined Contribution
A further 2.5 percent of pensionable income (effectively 2.325 percent of gross earnings) is
paid into personal pension accounts.
Quasi-mandatory Occupational
The modeling uses the industrins och handelns till�ggspension (ITP), white-collar workers'
scheme. Its defined benefit is 10 percent of final salary on earnings up to a ceiling of
7.5 times the base amount--SEK 291,000 in 2002. Between this threshold and 3.1 times
average earnings, the replacement rate is 65.0 percent, and from 3.1 to 4.6 times average
113
114 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
earnings, 32.5 percent. A full pension requires 30 years' contributions. Shorter tenures
deliver a proportionally reduced benefit. Indexation of pensions in payment is discre-
tionary, but recent increases have been broadly in line with prices. The ITP also has a
defined-contribution component, with a contribution of 2 percent of gross earnings.
Personal Income Tax and Social Security Contributions
Tax concessions for pensioners were abolished in 2003 as part of the policy package that
included the introduction of the guarantee pension. There are no allowances for pension
income. Social security contributions are not levied on pension income.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 43.9 54.4 64.8 96.9 132.4 167.8
(% of average earnings)
Net pension level 48.1 58.4 68.2 98.7 129.9 155.1
(% of average net earnings)
Gross replacement rate 87.8 72.5 64.8 64.6 66.2 67.1
(% of individual earnings)
Net replacement rate 90.2 76.4 68.2 70.1 74.3 75.0
(% of individual net earnings)
Gross pension wealth 7.0 8.7 10.4 15.5 21.0 26.6
(multiple of average earnings) 7.8 9.6 11.4 16.7 23.0 29.3
Net pension wealth 7.7 9.3 10.9 15.8 20.6 24.5
(multiple of average net earnings) 8.6 10.4 12.1 17.0 22.8 27.3
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 115
Sweden
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC (OP) occupational DC DC (OP) occupational DC
earnings-related targeted earnings-related targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC (OP) occupational
pensioner: total DC earnings-related targeted
Source: OECD pension models.
Note: OP = occupational plan.
Switzerland
THE SWISS PENSION SYSTEM HAS THREE MAIN PARTS. The public scheme is earnings related
with a progressive formula. There are also mandatory occupational pensions and an
income-tested supplementary benefit.
Qualifying Conditions
Pensionable age under the public scheme and mandatory occupational pensions is cur-
rently 65 for men and 63 for women, although the latter will increase to 64 by 2005.
Benefit Calculation
Earnings-Related
The public pension is based on average lifetime earnings. If these are less than CHF 37,080,
then the benefit is CHF 9,146 plus 26 percent of average lifetime earnings. Above the thresh-
old, the entitlement is CHF 12,854 plus 16 percent of average lifetime earnings. There is a
minimum pension of CHF 12,360 and a maximum pension of twice that level (20 and 40
percent of average earnings, respectively). Pensions in payment are indexed 50 percent to
prices and 50 percent to nominal earnings.
Mandatory Occupational
The system of mandatory occupational pensions was introduced in 1985. It is built around
defined credits to an individual's pension account. These vary by sex and age:
Men (age) 25�34 35�44 45�54 55�64
Women (age) 25�31 32�41 42�51 52�63
Credit (% of coordinated earnings) 7 10 15 18
Earlier years' contributions must receive a minimum interest rate, which was cut from 4.00
to 3.25 percent from 2003, with further reductions planned. The modeling assumes that the
interest rate will be the same as earnings growth over the long term. This gives a man with
a full career a total credit of 500 percent of earnings at age 65. The minimum annuity rate
of 7.2 percent implies a full-career replacement rate of (500 7.2% =) 36 percent. The defined
credits apply only to coordinated earnings: between the maximum pension of the public
scheme (CHF 24,720) and three times that level (CHF 74,160), equal to 38 and 115 percent
of average earnings, respectively.
Targeted
The supplementary benefit scheme targets a minimum income for single people of
CHF 16,880 (26 percent of average earnings). The supplementary benefit is indexed in the
same way as the public old-age pensions to a mixed index of 50 percent prices and 50 per-
cent wages. There are discretionary cantonal additions for low-income pensioners; these
are disregarded in the model.
116
HIGH-INCOME OECD COUNTRIES 117
Personal Income Tax and Social Security Contributions
Swiss cantons often grant pensioners an additional allowance, but there is no extra
allowance in the federal income tax. The modeling assumes a resident of the city of Zurich
in the canton of Zurich. There are no special allowances for pension income. Social secu-
rity contributions are not levied on pension income.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 31.4 45.2 58.2 66.3 66.3 66.3
(% of average earnings) 31.5 45.6 58.8 67.1 67.1 67.1
Net pension level 37.8 53.1 67.3 75.7 75.7 75.7
(% of average net earnings) 38.0 53.6 68.0 76.6 76.6 76.6
Gross replacement rate 62.8 60.2 58.2 44.2 33.1 26.5
(% of individual earnings) 63.0 60.7 58.8 44.7 33.5 26.8
Net replacement rate 71.4 68.9 67.3 53.0 41.4 34.3
(% of individual net earnings) 71.6 69.5 68.0 53.6 41.8 34.7
Gross pension wealth 5.5 7.9 10.1 11.5 11.5 11.5
(multiple of average earnings) 6.7 9.7 12.5 14.2 14.2 14.2
Net pension wealth 6.6 9.3 11.7 13.2 13.2 13.2
(multiple of average net earnings) 8.1 11.4 14.4 16.3 16.3 16.3
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
118 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Switzerland
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
occupational earnings-related occupational earnings-related
targeted targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions occupational
pensioner: total earnings-related targeted
Source: OECD pension models.
The United Kingdom
THE U.K. PUBLIC SCHEME HAS TWO TIERS, a flat-rate basic pension and an earnings-related
additional pension, which are complemented by a large voluntary private pension sector.
A new income-related benefit (pension credit) has recently been introduced to target extra
spending on the poorest pensioners.
Qualifying Conditions
Pension age, currently 65 for men and 60 for women, will be equalized at 65 from 2010.
The eligibility age for the minimum income guarantee (Mig) or pension credit is 60, and
will increase in line with women's pension age. The new savings credit is available only
from age 65 for both men and women. To qualify for the basic state pension, people need
to pay social security contributions or have credits for approximately nine-tenths of their
potential working lives (44 years). A proportionally reduced pension is available for peo-
ple who do not meet the full condition, but only to a minimum of 25 percent (11 years).
Benefit Calculation
Basic
The full basic state pension for a single person was �3,896 for the calendar year 2002.
Earnings-Related
The state second pension (S2P) has a progressive schedule. For earnings between the
lower-earnings limit (�3,910 per year in 2002/03) and the first threshold (�10,800), the
replacement rate is 40 percent of the difference, regardless of earnings. Over the next
range, the replacement rate is 10 percent, ending at �24,650. Between this threshold and
the ceiling, the replacement rate is 20 percent. The ceiling was �30,505 in 2002/03. The ben-
efit value is calculated on average lifetime salary, with earlier years' pay uprated with
average economywide earnings. The benefit is then price indexed after retirement.
Targeted
The minimum income guarantee is, from 2003/04, converted into a pension credit. For con-
sistency, the pension credit has been modeled using 2002 calendar year parameters. The tar-
get annual income level was �5,041. The pension credit includes a new savings credit on top
of the guarantee credit that replaces Mig. This reduces the withdrawal of benefits from 100
percent under the Mig to 40 percent. Individuals whose income (apart from the pension
credit) is less than the target minimum but more than a "starting point" receive a top-up.
The starting point is equal to the full value of the basic pension. The top-up is 60 percent of
income above the starting point. For people with incomes above the target minimum
income, the benefit is reduced by 40 percent of the amount of the excess. The maximum
credit for 2004/05 is therefore (�105 �80) 60 percent = �15 per week.
119
120 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Personal Income Tax and Social Security Contributions
A single person under 65 had an income tax allowance of �4,615 per year in 2002/03, com-
pared with �6,100 for ages 65�74 and �6,370 for ages 75 or over. Once a pensioner's total
income exceeds �17,900, the additional allowances are withdrawn at 50 percent of the
excess, so that high-income pensioners have the same tax allowances as people of working
age. No special reliefs are available for pension income. Social security contributions are
not levied on the income of those over state pension age.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 33.7 34.8 37.1 43.9 45.1 45.1
(% of average earnings)
Net pension level 43.6 44.9 47.6 55.1 56.3 56.3
(% of average net earnings)
Gross replacement rate 67.4 46.4 37.1 29.3 22.5 18.0
(% of individual earnings)
Net replacement rate 78.4 57.7 47.6 38.2 29.8 24.7
(% of individual net earnings)
Gross pension wealth 5.0 5.2 5.5 6.6 6.7 6.7
(multiple of average earnings) 5.8 6.0 6.4 7.5 7.7 7.7
Net pension wealth 6.5 6.7 7.1 8.2 8.4 8.4
(multiple of average net earnings) 7.5 7.7 8.2 9.4 9.6 9.6
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
HIGH-INCOME OECD COUNTRIES 121
The United Kingdom
a. Gross pension level b. Gross replacement rate
2.5 1.25
level 2.0 1.00
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
basic credit basic credit
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum basic credit
Source: OECD pension models.
The United States
THE PUBLICLY PROVIDED PENSION BENEFIT IN THE UNITED STATES, known as social security,
has a progressive benefit formula. There is also a means-tested top-up payment available
for low-income pensioners.
Qualifying Conditions
The current normal retirement age is between 65 and 66, increasing to 67 in steps. Eligibility
depends on the number of years of contributions, with a minimum requirement of 10 years.
Early retirement is possible from age 62 with lower benefits.
Benefit Calculation
Earnings-Related
The benefit formula is progressive. The first US$ 592 a month of relevant earnings attracts
a 90 percent replacement rate. Earnings between US$ 592 and US$ 3,567 a month (22 and
133 percent of average earnings, respectively) are replaced at 32 percent. A replacement
rate of 15 percent applies between the latter threshold and the ceiling. Earlier years' earn-
ings are revalued to age 60 with growth in average earnings. There is no adjustment
between ages 60 and 62. Thereafter, previous earnings are revalued with prices to age 67.
The benefit is based on the 35 highest years' earnings. The ceiling for contributions and
benefits is US$ 84,900 a year--2.5 times average earnings--uprated annually in line with
earnings growth. Pensions in payment are price indexed.
Targeted
Single people over the age of 65 are eligible for up to US$ 6,540 a year of supplemental
security income (approximately 20 percent of average earnings), depending on assets and
other income. This benefit is indexed to prices. There is a small (US$ 20 a month)
disregard. The benefit is then withdrawn at a 100 percent rate against income above this
level. States often supplement the federally determined minimum: 28 administer their
own system and 12 offer supplements operated by the federal administration. The average
additional payment in these 12 states is 13 percent for single pensioners and 18 percent
for couples.
Personal Income Tax and Social Security Contributions
Older people are entitled to an additional deduction in the federal income tax. For single
people of working age, the deduction is US$ 4,700 compared with US$ 5,850 for over 65s.
There is also a tax credit for poorer pensioners. The maximum credit is US$ 1,125 for a single
individual. This is withdrawn against income and is exhausted once total income exceeds
US$ 17,500, or nontaxable public pension benefits exceed US$ 5,000. Up to one-half of
122
HIGH-INCOME OECD COUNTRIES 123
social security (public pension) benefits is taxable if income, including one-half of the
pension, exceeds US$ 25,000. This proportion can increase to a maximum of 85 percent for
higher-income pensioners if half of social security benefits plus other income exceeds
US$ 34,000. Social security contributions are not levied on pension income.
Following the OECD standard methodology, the modeling looks at a person living in
Detroit, Michigan. The state income tax system for Michigan gives an extra tax-free
allowance of US$ 900 for single people over age 65. Public pensions are entirely exempt
from the Michigan state income tax, as is the first US$ 33,810 of income from a private
pension. All income from pensions (public and private) is exempt from the Detroit
income tax.
No social security contributions are levied on pension income.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 24.8 31.7 38.6 49.8 56.3 62.7
(% of average earnings)
Net pension level 32.7 41.9 51.0 63.0 69.8 77.1
(% of average net earnings)
Gross replacement rate 49.6 42.3 38.6 33.2 28.1 25.1
(% of individual earnings)
Net replacement rate 61.4 54.6 51.0 44.9 39.0 35.5
(% of individual net earnings)
Gross pension wealth 3.5 4.5 5.5 7.1 8.0 8.9
(multiple of average earnings) 4.1 5.3 6.4 8.3 9.3 10.4
Net pension wealth 4.7 6.0 7.3 9.0 9.9 11.0
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
124 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
The United States
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related targeted earnings-related targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setar 1.00
ent
pension
1.5 mecalper 0.75
relative 1.0 ss 0.50
gro
gross
0.5
and ndaten 0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
etar
income 0.4
0.75
and
0.3 placementer 0.50
earnings
0.2
of netfo
n
0.25
0.1
proportion proportio
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total targeted
Source: OECD pension models.
11. Eastern Europe and Central Asia
125
Bulgaria
THE NEW BULGARIAN SYSTEM COMBINES AN EARNINGS-RELATED public scheme with manda-
tory contributions to individual accounts.
Qualifying Conditions
The pension age is currently being increased gradually and will reach 63 for men and 60
for women from 2009. A pension also requires qualification points, which are the sum of
age and years of service. These need to be 100 for men and 90 for women, which is equiv-
alent to 37 years' coverage for men and 30 for women.
Benefit Calculation
Earnings-Related
The earnings-related scheme pays 1 percent of earnings for each year of service. There is a
maximum benefit of four times the social pension.
Minimum
The minimum pension is 115 percent of the social pension. The social pension is Lev 44 per
month.
Defined Contribution
Some 2 percent of earnings are diverted to the individual account. Accumulated capital is
converted to an income stream by the pension fund, and no annuity is bought. The actuarial
calculations are set by the state insurance supervisory agency. For comparison with other
countries, the modeling assumes that this calculation is actuarially fair, based on the stan-
dard discount rate and price uprating of the benefit.
Personal Income Tax and Social Security Contributions
Employer and employee contributions to the mandatory pension system are deductible
under the personal income tax. Investment returns are not taxed (although this provision
might be subject to amendment). Benefit payments from both the pay-as-you-go and
mandatory private pension funds are not taxed. The only exception is payments of capital
to dependents of deceased members, which are subject to inheritance tax. The tax schedule
follows:
Band lower limit (Lev) 0 1,320 1,680 4,800 12,000
Rate (%) 0 18 24 28 29
Total social security contributions are 22.25 percent for employees and 8.75 percent for
employers. Of the total, 0.5 percentage points of employee and 1.5 percentage points of
127
128 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
employer contributions are diverted to the funded account. There is a ceiling on contribu-
tions of Lev 1,000 per month. Pensioners do not pay social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 24.8 37.2 49.7 74.5 80.0 83.9
(% of average earnings) 22.6 34.0 45.3 67.9 77.3 80.5
Net pension level 38.9 58.3 75.2 104.9 111.5 116.0
(% of average net earnings) 35.5 53.2 69.6 97.1 108.2 112.0
Gross replacement rate 49.7 49.7 49.7 49.7 40.0 33.5
(% of individual earnings) 45.3 45.3 45.3 45.3 38.7 32.2
Net replacement rate 67.1 73.8 75.2 74.0 61.8 52.9
(% of individual net earnings) 61.2 67.3 69.6 68.5 60.0 51.1
Gross pension wealth 3.5 5.2 6.9 10.4 11.2 11.7
(multiple of average earnings) 4.2 6.3 8.4 12.6 14.3 14.9
Net pension wealth 5.4 8.1 10.5 14.6 15.5 16.2
(multiple of average net earnings) 6.6 9.9 12.9 18.0 20.0 20.7
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
EASTERN EUROPE AND CENTRAL ASIA 129
Bulgaria
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
minimum minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related minimum
Source: Axia Economics APEX model.
Croatia
A NEW SYSTEM COMBINING PUBLIC AND MANDATORY PRIVATE PENSIONS was introduced in
Croatia in 2002. This is mandatory for workers aged 40 years and younger, and optional
for those between 40 and 50 years. The public scheme is a points system but has a redis-
tributive formula.
Qualifying Conditions
An increase in pension age has been legislated, and this will reach 65 for men and 60 for
women in 2009. Fifteen years' service is required to receive any pension benefit. Early
retirement is possible five years early, conditional on 35 years' service (men) and 30 years'
(women).
Benefit Calculation
Earnings-Related
The averaging period for earnings in the pension formula will increase gradually from the 10
consecutive best years to full career, reaching the latter in 2008. The points system implies
that the pension is 0.25 percent of individual earnings divided by average covered earnings
plus 0.25 percent of average covered earnings for each year of service (which are shown as
earnings--related and basic, respectively--in the figures). There is no ceiling on pensionable
earnings and no minimum pension under the new system. The average covered earnings in
the formula are those for 1998, uprated 50 percent in line with economywide average earn-
ings and 50 percent in line with prices. Average earnings in 1998 were HRK 4,141. Pensions
in payment also follow the mixed 50�50 indexation to earnings and prices.
Defined Contribution
Some 5 percent of social security contributions are diverted to funded pensions for people
covered by the new system. The accumulated balance is converted to a price-indexed life
annuity at retirement.
Personal Income Tax and Social Security Contributions
The income tax allowance for workers is HRK 1,500 per month. The bands of the tax
schedule are multiples of this deductible amount, giving the following on an annual basis:
Band lower limit HRK (000s) 18 36 90
Rate (%) 15 25 35
The tax allowance for pensioners is 1.7 times that for workers (that is, HRK 2,550 per month).
The total social security contribution rate is 19.50 percent: 10.75 percent for employees
and 8.75 percent for employers. Pensioners do not pay social security contributions.
130
EASTERN EUROPE AND CENTRAL ASIA 131
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 32.5 36.3 40.0 47.5 52.4 54.7
Gross pension level 23.6 31.0 38.4 53.1 67.8 82.6
(% of average earnings) 19.6 25.3 31.1 42.5 54.0 65.5
Net pension level 37.9 49.8 61.6 83.9 104.0 123.0
(% of average net earnings) 31.4 40.6 49.9 68.3 85.2 100.9
Gross replacement rate 47.3 41.3 38.4 35.4 33.9 33.0
(% of individual earnings) 39.1 33.7 31.1 28.4 27.0 26.2
Net replacement rate 66.7 63.1 61.6 59.7 59.6 58.9
(% of individual net earnings) 55.2 51.5 49.9 48.6 48.8 48.3
Gross pension wealth 3.4 4.5 5.5 7.6 9.7 11.8
(multiple of average earnings) 4.1 5.3 6.5 8.8 11.2 13.5
Net pension wealth 5.5 7.2 8.9 12.0 14.9 17.5
(multiple of average net earnings) 6.6 8.5 10.4 14.2 17.6 20.9
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
132 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Croatia
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0
replacement 0.50
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
basic basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setar 1.00
ent
pension
1.5 mecalper 0.75
relative 1.0 ss 0.50
gro
gross
0.5
and ndaten 0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 etar 1.00
income 0.4
0.75
and
0.3 placementer 0.50
earnings 0.2
of netfo
n
0.25
0.1
proportion proportio
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related basic
Source: Axia Economics APEX model.
The Czech Republic
THE CZECH PUBLIC SCHEME HAS A BASIC ELEMENT AND AN EARNINGS-RELATED part calculated
according to a progressive formula. There is also a minimum pension in this program.
Qualifying Conditions
A phased increase in the standard retirement age will make it 63 for men from 2013. The
pension eligibility age will be 59 to 63 for women, depending on the number of children
they have. A full pension requires 25 years' coverage, but people with 15 years' contribu-
tions may receive a pension from age 65.
Benefit Calculation
Basic
The value of the basic pension is CZK 1,310 per month. There is no statutory indexation
requirement for the value of the basic benefit alone, but total pensions in payment must be
increased at least by prices plus one-third of real wage growth.
Earnings-Related
The earnings-related pension gives 1.5 percent of earnings for each year of contributions.
Currently the earnings measure takes an average across all years since 1985, but it will
gradually reach 30 years. There is a progressive formula with the first CZK 7,100 per
month replaced at 100 percent; the slice of earnings between this limit and CZK 16,800, at
30 percent; and above this level, at 10 percent. The first threshold, below which there is
100 percent replacement, is equivalent to just over 40 percent of average earnings, while
the second threshold is just below average earnings. There is no statutory indexation
requirement for these thresholds. Earlier years' earnings in the benefit formula are val-
orized fully to average earnings.
There is no specific statutory indexation requirement for the earnings-related pension
component in payment. However, the combined total pension benefit (flat-rate and
earnings-related components) is adjusted at least to price inflation, with additional, real
increases of at least one-third of real wage growth.
Minimum
The total value of the minimum pension benefit is CZK 2,080, which is made up of a min-
imum earnings-related pension of CZK 770 plus the basic component of CZK 1,310. This
combined minimum pension is indexed as described above.
Social Assistance
Older people are covered by the general social-assistance scheme and related benefits in
kind. The target safety-net income for a single-person household is CZK 1,780.
133
134 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Personal Income Tax and Social Security Contributions
Old-age pensions are not taxed up to a value of CZK 144,000. The standard tax-free
allowance is CZK 38,400, giving pensioners an effective allowance four times higher than
workers have. There are no special income tax reliefs for pension income. Recipients of
old-age pensions do not pay social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 35.3 40.0 44.4 47.6 50.7 53.9
(% of average earnings)
Net pension level 46.2 52.4 58.2 62.3 66.4 70.6
(% of average net earnings)
Gross replacement rate 70.5 53.3 44.4 31.7 25.4 21.6
(% of individual earnings)
Net replacement rate 88.3 68.3 58.2 42.9 35.3 31.0
(% of individual net earnings)
Gross pension wealth 5.8 6.6 7.3 7.8 8.3 8.9
(multiple of average earnings) 6.8 7.7 8.6 9.2 9.8 10.4
Net pension wealth 7.6 8.6 9.6 10.2 10.9 11.6
(multiple of average net earnings) 8.9 10.1 11.3 12.1 12.9 13.7
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
EASTERN EUROPE AND CENTRAL ASIA 135
The Czech Republic
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related basic earnings-related basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates
1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total basic
Source: OECD pension models.
Estonia
THE NEW SYSTEM IN ESTONIA COMBINES AN EARNINGS-RELATED PUBLIC SCHEME with manda-
tory contributions to funded pensions. There is also a safety-net national pension and a
flat-rate basic scheme.
Qualifying Conditions
The pension age will be equalized for men and women at age 63 from 2016. The pension
may be claimed up to three years before the standard age (from age 60 in the long term)
provided that the individual retires.
Benefit Calculation
Basic
There is a basic pension payable to all contributors with 15 years' coverage. The 2003 value
is EEK 447.
Earnings-Related
Since 1998, the pension has been earnings related with a points system. Points depend
on individual earnings relative to the average. Accumulated points are multiplied by
the annual pension-insurance coefficient to calculate pension entitlement. The coefficient
was EEK 31.69 per month in 2002 and EEK 34.04 in 2003. This is equivalent to an accrual
rate of approximately 0.5 percent per year of service (31.69/6,122 [monthly average
earnings] = 0.005). There is no ceiling on pensionable earnings. Parameters are uprated
annually to 50 percent of price inflation and 50 percent of growth in contribution revenues.
The pension value is reduced by 4.8 percent for each year that an individual retires early.
Deferring pension earns an increment of 10.8 percent per year.
Targeted
A minimum retirement-income guarantee is provided by the national pension. This was
EEK 867.20 per month in 2002 and EEK 931.00 in 2003. This is substantially above the
social-assistance minimum, which has not therefore been modeled.
Defined Contribution
Individuals choosing the funded option must make an additional contribution of 2 percent
of earnings into their pension fund. Four percentage points of the total social security con-
tribution is then also diverted to this fund. New labor-market entrants (those born in 1983
or after) are required to take the funded option. Most current workers may choose this
option (those born in 1942 or after, up to age 60).
136
EASTERN EUROPE AND CENTRAL ASIA 137
Personal Income Tax and Social Security Contributions
The personal income tax has a single, flat rate of 26 percent. There is a general allowance of
EEK 3,000 per month. Pension payments now count as taxable income, but only if they
exceed three times the general allowance. Pensioners are also entitled to the general
allowance.
Employers pay social security contributions of 33 percent of gross earnings, of which 20
percentage points finance pensions. There is no ceiling on contributions. Pensions in pay-
ment are not subject to social security contributions. As noted previously, individuals tak-
ing the funded option must contribute 2 percent of their earnings.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 29.2 40.4 51.6 74.0 96.5 118.9
(% of average earnings)
Net pension level 34.5 47.7 60.9 87.4 113.8 140.2
(% of average net earnings)
Gross replacement rate 58.4 53.9 51.6 49.4 48.2 47.5
(% of individual earnings)
Net replacement rate 59.9 60.6 60.9 61.3 61.5 61.7
(% of individual net earnings)
Gross pension wealth 4.2 5.8 7.4 10.6 13.7 16.9
(multiple of average earnings) 5.4 7.5 9.5 13.6 17.7 21.8
Net pension wealth 4.9 6.8 8.7 12.5 16.2 20.0
(multiple of average net earnings) 6.4 8.8 11.2 16.0 20.9 25.7
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
138 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Estonia
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
basic basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related basic
Source: Axia Economics APEX model.
Hungary
THE NEW SYSTEM IN HUNGARY COMBINES AN EARNINGS-RELATED PUBLIC PENSION with
mandatory, funded, defined-contribution schemes. The modeling assumes that workers
are covered by the mixed system.
Qualifying Conditions
A phased increase in pension eligibility age will equalize it at 62 for men and women (from
60 and 55, respectively). The age for men reached 62 in 2000 and will reach 62 for women
from 2009. Also, 20 years' service is required for both earnings-related and minimum pen-
sions. For those retiring before the start of 2009, 15 years' service is required for a partial
pension. The reformed system was introduced in June 1998. People who switched volun-
tarily to the mixed system were allowed to return to the pure pay-as-you-go system until
the end of 2002. The obligation for new entrants to join a private pension was suspended
for 2002.
Benefit Calculation
Earnings-Related
For those covered by the mixed system, the accrual rate is 1.22 percent of earnings for each
year of service (subject to the contribution ceiling). This compares with an accrual rate of
1.65 percent for those covered by the pay-as-you-go system alone.
Currently, the earnings base is income of all years since 1988, moving toward the full
lifetime. Earlier years' earnings excluding the last two years before retirement are val-
orized with economywide average earnings. A ceiling on pensionable earnings was intro-
duced in 1992. In 2002, the ceiling was HUF 2,368,850 (225 percent of average earnings).
Increases in the ceiling since 2002 took it to approximately 2.5 times average earnings in
2003 and 3.0 times in 2004.
The pension in payment has been indexed half to wages and half to prices since 2000.
Defined Contribution
Some 8 percent of gross pensionable earnings is diverted to the funded plan from 2004 for
people covered by the mixed pension option, increased from 6 percent in 2002 and 7 percent
in 2003. By use of unisex life tables and the same indexation of pension in payment as the
public scheme, the accumulated capital must be converted into an annuity on retirement.
Minimum
The minimum pension was worth HUF 20,100 a month in 2002 (approximately 23 percent
of average earnings). Its value is indexed in the same way as the earnings-related scheme.
The minimum pension will be abolished from 2009.
139
140 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Personal Income Tax and Social Security Contributions
There is no additional relief for pensioners beyond the standard tax credit that also applies
to people of working age. The earnings-related pension has not been taxable since 2002;
previously it was taxed at a rate of zero. The social security pension is taxed when it is
awarded. Twenty-five percent of individual contributions to both private and public pen-
sions could be deducted from the income tax liability. This credit was abolished in 2004.
Neither investment returns nor private pension payments are currently taxed. Social secu-
rity contributions are not levied on pension income.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 37.7 56.5 75.4 113.0 150.7 165.6
(% of average earnings)
Net pension level 48.9 71.8 90.5 127.7 151.7 164.3
(% of average net earnings)
Gross replacement rate 75.4 75.4 75.4 75.4 75.4 66.3
(% of individual earnings)
Net replacement rate 86.6 90.9 90.5 99.1 92.6 81.8
(% of individual net earnings)
Gross pension wealth 6.1 9.1 12.2 18.3 24.4 26.8
(multiple of average earnings) 7.5 11.3 15.1 22.6 30.1 33.1
Net pension wealth 7.9 11.6 14.6 20.6 24.5 26.6
(multiple of average net earnings) 9.8 14.3 18.1 25.5 30.3 32.8
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
EASTERN EUROPE AND CENTRAL ASIA 141
Hungary
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related
Source: OECD pension models.
Latvia
THE NEW SYSTEM IN LATVIA COMBINES AN EARNINGS-RELATED PUBLIC SCHEME, based on
notional accounts, with mandatory contributions to funded pensions. There is also a
safety-net pension.
Qualifying Conditions
The pension age will reach age 62 for both sexes in the long term. A full pension entitle-
ment requires 10 years' service.
Benefit Calculation
Earnings-Related
The new pension system is based on notional accounts. The pension value is the sum of
notional capital at retirement (contributions uprated in line with the covered wage bill)
divided by the g-value (calculated annually using projected life expectancy at retirement
age with a unisex life table). The ceiling on covered earnings is Lat 17,300. The pension in
payment is currently uprated by consumer prices plus 25 percent of real wage-bill growth.
From 2011, it is envisaged that the share of wage growth will increase to 50 percent, with
the possibility of moving to 100 percent earnings indexation.
Minimum
The guaranteed minimum pension is set at the same level as the general safety-net benefit:
50 percent of the minimum wage. From 2002, this varies with the length of service in the
pension-insurance system:
Years of service 20 30 >30
Multiple of minimum pension 1.1 1.3 1.5
Defined Contribution
People under age 30 at the time of the reform must contribute to a new funded scheme.
Those between 30 and 49 must choose between remaining only in the public, pay-as-you-
go system or belonging to both the public and the funded scheme. The proportion of earn-
ings diverted into the funded scheme is very small at first--just 2 percent--but will
increase over a 10-year period, with the growth concentrated in later years. The envisaged
path is as follows:
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Contribution (%) 2 2 2 2 2 2 4 8 9 10
At retirement, the accumulated capital must be converted to an income stream under
these alternatives. First, individuals can add the balance of the fund to the notional capital
142
EASTERN EUROPE AND CENTRAL ASIA 143
built up under the public scheme, which yields a benefit dependent on the g-value.
Second, they can buy a whole-life annuity from a life insurance company (without restric-
tion on, for example, indexation or provision of survivor's benefits).
Personal Income Tax and Social Security Contributions
There is a flat rate tax of 25 percent on all income above a threshold. This is Lat 252 per
year for people of working age and Lat 1,200 per year for people of pension age. Pension
income is fully taxable. Social security contributions are 35 percent of earnings, falling
to 33 percent from 2003, 9 points of which are levied on employees, the rest on employers.
Contributions are income tax deductible. Pensions are not subject to social security
contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 31.8 43.6 58.2 87.3 116.4 145.4
(% of average earnings)
Net pension level 46.3 63.6 81.8 113.6 145.4 177.2
(% of average net earnings)
Gross replacement rate 63.6 58.2 58.2 58.2 58.2 58.2
(% of individual earnings)
Net replacement rate 89.2 83.7 81.8 76.7 74.1 72.5
(% of individual net earnings)
Gross pension wealth 4.6 6.3 8.4 12.6 16.8 21.0
(multiple of average earnings) 5.8 7.9 10.5 15.8 21.1 26.3
Net pension wealth 6.7 9.2 11.8 16.4 21.0 25.6
(multiple of average net earnings) 8.4 11.5 14.8 20.6 26.3 32.1
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
144 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Latvia
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
minimum minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related minimum
Source: Axia Economics APEX model.
Lithuania
THE NEW SYSTEM IN LITHUANIA HAS A TWO-TIER PUBLIC SCHEME with an earnings-related
and a flat-rate benefit. There are also mandatory contributions to funded pensions.
Qualifying Conditions
Pensionable age will reach 62.5 for men and 60 for women in the longer term. Individuals
must have 15 years' coverage to receive a pension. To qualify for a contribution year, the
individual must have made contributions equivalent to a full year at the minimum wage.
Benefit Calculation
Basic
The basic pension is a flat-rate contributory benefit. The full rate is earned with 30 years'
contributions, with a proportionally reduced benefit available for people with shorter con-
tribution histories. Its value is set at 110 percent of the government's minimum subsistence
level, which is Lit 147 for 2002.
Earnings-Related
The earnings-related pension offers 0.5 percent of individual average pay for each year of
coverage. Earlier years' earnings are uprated in line with average earnings. The ceiling on
pensionable pay is five times average earnings.
It is possible to defer the pension after standard age: both the basic and earnings-related
components are increased by 8 percent for every year of deferral.
Defined Contribution
The law establishing the mandatory funded scheme was passed in December 2002. This
envisages an initial contribution rate of 2.5 percent with an eventual increase to 5.5 percent
should the finances of the social security program prove sufficiently robust. The value
of the pay-as-you-go components will be reduced proportionally to the amount of the con-
trbution diverted to the pension funds.
Personal Income Tax and Social Security Contributions
There is a standard allowance of Lit 290 per month (with higher allowances for disabled
people and people with numerous children). The standard income tax rate is 33 percent,
although a lower 15 percent rate applies to income from some forms of saving. Public pen-
sions are not subject to tax.
The total social security contribution rate is 34 percent of earnings; the employee pays 3.0
percentage points. Of the total contribution, some 25.0 percentage points are earmarked for
the pension system; the employee pays 2.5 points. There is no ceiling on contributions
145
146 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
(although there is a ceiling on benefits: see above). Pensioners do not pay social security
contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 35.0 44.2 53.4 71.7 90.1 108.5
(% of average earnings) 32.6 40.6 48.6 64.6 80.6 96.6
Net pension level 46.8 59.0 71.3 95.9 120.5 145.0
(% of average net earnings) 43.6 54.3 65.0 86.4 107.8 129.2
Gross replacement rate 69.9 58.9 53.4 47.8 45.1 43.4
(% of individual earnings) 65.2 54.1 48.6 43.1 40.3 38.7
Net replacement rate 81.7 75.1 71.3 67.2 64.9 63.5
(% of individual net earnings) 76.2 69.0 65.0 60.5 58.1 56.6
Gross pension wealth 5.0 6.3 7.6 10.2 12.8 15.4
(multiple of average earnings) 6.3 7.9 9.5 12.6 15.7 18.8
Net pension wealth 6.6 8.4 10.1 13.6 17.1 20.5
(multiple of average net earnings) 8.5 10.6 12.7 16.8 21.0 25.1
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
EASTERN EUROPE AND CENTRAL ASIA 147
Lithuania
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
minimum minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related minimum
Source: Axia Economics APEX model.
Poland
THE NEW PENSION SYSTEM IN POLAND APPLIES TO PEOPLE AGED 50 AT THE TIME OF THE
REFORM. The new public scheme is based on notional accounts. People under 30 at the time
of the reform must participate in the funded scheme; people aged 30�50 could choose, but
the choice had to be made in 1999 and was irrevocable.
Qualifying Conditions
The minimum pension age in the new system will be 65 for men and 60 for women. For the
minimum pension, 25 and 20 years' contributions are required from men and women,
respectively.
Benefit Calculation
Earnings-Related
A contribution of 12.22 percent of earnings is credited to notional accounts. These contri-
butions are uprated (by price inflation plus 75 percent of the growth of the real covered-
wage bill) between the time they are made and the time of retirement. From 2004 onward,
the notional interest rate will be defined as the greater of the growth in real covered-wage
bill and growth in prices. At retirement, accumulated notional capital is divided by the
g-value to arrive at the pension. The g-value is average life expectancy at retirement age.
The g-value is calculated using projections from the United Nations and World Bank pop-
ulation database. The ceiling on contributions and pensionable earnings is PLN 64,620, set
annually at 2.5 times projected average earnings. Pensions in payment are uprated in line
with 80 percent of prices and 20 percent of average earnings. However, the 2004 govern-
ment proposal includes a shift to prices uprating from 2005.
Minimum
The minimum pension was PLN 530 per month in 2001/02 and PLN 533 in 2002/03. The
model uses the average value for calendar 2002. The target is adjusted to 80 percent prices
plus 20 percent earnings.
Defined Contribution
Some 7.3 percentage points of the total contribution are diverted to the funded scheme for
those compulsorily covered or voluntarily choosing this option. At retirement, the accu-
mulated capital must be converted to an annuity. At the minimum, this must be price
indexed (to be used in the model calculation). Annuity rates will most likely have to be
based on unisex life tables, though this has not been decided yet.
148
EASTERN EUROPE AND CENTRAL ASIA 149
Personal Income Tax and Social Security Contributions
There is no specific income tax relief for pensioners. There are no special rules for the tax-
ation of pension income. The one exception is that employees may deduct PLN 1,444 for
2002 from their incomes for work-related expenses (although this varies with the number
of workplaces and whether the workplace is the same as the dwelling). Of course, this
deduction does not apply to pensioners. Pension income is not subject to contributions for
pensions, unemployment insurance, and the like. However, there is a tax-deductible
health-insurance contribution of 7.75 percent. This contribution increases by 0.25 percentage
points a year from 2003 to reach 9.00 percent, but only 7.75 percent will be tax deductible.
It is paid by both pensioners and workers.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 28.4 42.6 56.9 85.3 113.7 139.4
(% of average earnings) 24.2 31.0 41.4 62.1 82.8 101.5
Net pension level 36.4 53.0 69.7 103.1 136.5 166.7
(% of average net earnings) 31.4 39.4 51.6 75.9 100.2 122.1
Gross replacement rate 56.9 56.9 56.9 56.9 56.9 55.8
(% of individual earnings) 48.4 41.4 41.4 41.4 41.4 40.6
Net replacement rate 69.6 69.7 69.7 69.8 70.5 71.0
(% of individual net earnings) 60.1 51.8 51.6 51.3 51.7 52.0
Gross pension wealth 4.0 5.9 7.9 11.9 15.8 19.4
(multiple of average earnings) 4.8 6.1 8.2 12.3 16.4 20.1
Net pension wealth 5.1 7.4 9.7 14.4 19.0 23.2
(multiple of average net earnings) 6.2 7.8 10.2 15.0 19.8 24.1
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
150 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Poland
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
targeted targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total pensioner: income tax earnings-related targeted
Source: OECD pension models.
The Slovak Republic
THE SLOVAK EARNINGS-RELATED, PUBLIC SCHEME HAS RECENTLY BEEN TRANSFORMED from a
standard defined-benefit formula to a point system. There is a minimum annual pension
accrual related to the minimum wage.
Qualifying Conditions
The normal pension age is gradually increasing to 62 for men and women, reaching 62 for
women in 2014. Eligibility depends on making at least 10 years of contributions.
Benefit Calculation
Earnings-Related
The new pension formula applies from 2004. Pension points are calculated as the ratio
of individual earnings to average earnings. Each pension point from 2004 is worth
SKK 183.58. This point value is indexed to average earnings.
Based on Slovak government estimates of 7.8 percent nominal wage growth in 2004 and
actual wage growth of 6.3 percent in 2003, the pension-point value for 2002 would have
been SKK 160.18. (Note that for comparison with other countries, the calculations are
based on the parameters had the reformed pension system been in operation in 2002.)
Average earnings in 2002 were SKK 13,511 per month. Dividing the point value by the
national average earnings gives the equivalent to the accrual rate in a defined-benefit
scheme, which is just under 1.2 percent.
There was a maximum pension of SKK 8,282 in the first half of 2002 and SKK 8,697 in
the second half. However, this is abolished under the new points-based system. Instead,
there is a ceiling on pensionable earnings, fixed in 2003 at three times average earnings.
Based on the 2002 average earnings, the ceiling would have been SKK 486,396 in that year.
Pensions in payment are indexed to the arithmetic average of earnings growth and
price inflation.
Minimum
The minimum pension is abolished under the new system. However, there is a mechanism
to lift low pensionable earnings to the level of the minimum wage, which for 2004 is
SKK 6,080. In 2002, the minimum wage was SKK 4,920 until October, when it was
increased to SKK 5,570.
Personal Income Tax and Social Security Contributions
There are no special tax allowances or credits for pensioners. Pensions are not subject to
the income tax. Pensioners do not pay social security contributions.
151
152 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 24.3 36.4 48.6 72.9 97.2 121.5
(% of average earnings)
Net pension level 30.1 45.2 60.2 90.4 120.5 150.6
(% of average net earnings)
Gross replacement rate 48.6 48.6 48.6 48.6 48.6 48.6
(% of individual earnings)
Net replacement rate 58.2 59.4 60.2 63.1 65.7 67.8
(% of individual net earnings)
Gross pension wealth 4.0 6.0 8.0 12.0 15.9 19.9
(multiple of average earnings) 4.9 7.3 9.8 14.6 19.5 24.4
Net pension wealth 4.9 7.4 9.9 14.8 19.8 24.7
(multiple of average net earnings) 6.0 9.1 12.1 18.1 24.2 30.2
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
EASTERN EUROPE AND CENTRAL ASIA 153
The Slovak Republic
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income
0.4
and 0.75
0.3
replacement 0.50
earnings
of 0.2 net
of
0.25
0.1
proportion
proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: OECD pension models.
Turkey
TURKEY HAS AN EARNINGS-RELATED PUBLIC PENSION SCHEME with an income-tested safety
net and a flat-rate supplementary pension.
Qualifying Conditions
Recent entrants (from September 1999) can draw a pension from age 60 (men) or 58
(women) with 7,000 days of contributions. This is equivalent to approximately 28 years of
contributions for continuous employment. An alternative eligibility condition is 25 years
of insurance coverage with 4,500 days of contributions.
The means-tested pension is payable from age 65 only to those who are disabled or
have no other social security rights.
Benefit Calculation
Earnings-Related
The pension under the new scheme is based on average lifetime earnings revalued in line
with nominal GDP growth. The pension has a nonlinear formula with years of coverage.
The first 10 years earn a pension of 35 percent of pay, with an extra 2 percent per year for
the next 15 years and 1 percent per year thereafter.
There is a floor above which contributions are required. The floor had three different
values during calendar 2002, varying between TRL 210 million at the beginning of the year
and TRL 328 million at the end.
There is a ceiling on pensionable earnings; its value was TRL 1,050 million at the start of
the year and TRL 1,638 million at the end of 2002.
Indexation of pensions in payment is to the consumer price index. Pensions are
adjusted monthly.
Minimum
There is a minimum pension, which varied between TRL 202 million and TRL 257 million
in 2002.
Targeted
The means-tested pension is paid quarterly. For the first half of 2002 the pension was
TRL 45 million per month; for the second, pension was TRL 49 million per month.
A monthly supplement is paid to all retirees. Its value started in 2002 at TRL 75 million.
As the monthly increases are awarded to individuals' earnings-related pensions, this
supplement is reduced by the amount of those increases.
154
EASTERN EUROPE AND CENTRAL ASIA 155
Personal Income Tax and Social Security Contributions
There are no special income tax allowances or credits for pensioners. Pension income is not
subject to income tax. Pension income is not subject to social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 48.1 67.6 87.2 126.2 143.8 143.8
(% of average earnings) 47.1 66.2 85.2 123.2 140.4 140.4
Net pension level 58.7 81.0 103.3 146.0 164.8 164.8
(% of average net earnings) 57.6 79.3 101.1 142.8 161.2 161.2
Gross replacement rate 96.2 90.2 87.2 84.1 71.9 57.5
(% of individual earnings) 94.2 88.2 85.2 82.2 70.2 56.2
Net replacement rate 113.2 106.7 103.3 99.9 84.3 66.8
(% of individual net earnings) 111.0 104.5 101.1 97.8 82.4 65.4
Gross pension wealth 6.1 8.5 11.0 15.9 18.2 18.2
(multiple of average earnings) 7.2 10.2 13.1 18.9 21.6 21.6
Net pension wealth 7.4 10.2 13.0 18.4 20.8 20.8
(multiple of average net earnings) 8.8 12.2 15.5 21.9 24.8 24.8
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
156 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Turkey
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related basic earnings-related basic
minimum minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total basic minimum
Source: OECD pension models.
12. Latin America and the Caribbean
157
Argentina
THE NEW SYSTEM IN ARGENTINA ALLOWS WORKERS TO CHOOSE between an earnings-related
public, defined-benefit scheme and a funded, privately managed, defined-contribution
plan. With 30 years' contributions or more, people also receive a (broadly) flat-rate benefit.
This is pay-as-you-go (PAYG) financed.
Qualifying Conditions
Normal retirement age is 65 for men and 60 for women. Retirement is possible only after
30 years of contributions, although each two years of deferral after the normal retirement
age counts as one contribution year. A reduced pension is available with 10 years of con-
tributions for individuals aged 70 that have contributed in five of the last eight years
before retirement.
Benefit Formula
Basic
The basic universal benefit (PBU) is a broadly flat-rate pension contingent on years of con-
tributions but not on preretirement earnings. Its value is adjusted ad hoc: it has been worth
approximately 28 percent of average earnings in the past few years. The entitlement is
increased by 1 percent per year of contribution above the minimum 30 years, up to a
maximum of 45 years.
Defined Contribution
The contribution rate for the funded scheme has varied over time. In the year 2000, for
example, it was 7.72 percent (after administrative charges and the premium for disability
insurance). In 2001 and 2002, the contribution was cut in response to macroeconomic
conditions, with approximately 2.75 percent of earnings going into retirement accounts. In
2003 and 2004, the overall contribution was 7.00 percent of earnings, of which 4.46 percent
went into individual accounts. The modeling assumes that this contribution rate is main-
tained in the long term.
Personal Income Tax and Social Security Contributions
Contributions and investment returns to the funded scheme are not taxed, but pension
payments count as taxable income.
There is a general income tax deduction of Arg$ 4,020. The rate schedule, above the
standard deduction, is:
Band lower limit Arg$ (000s) 0 10 20 30 60 90 120
Rate (%) 9 14 19 23 27 31 35
159
160 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Employers pay social security contributions of 22 to 31 percent of gross earnings, of which
roughly 7 to 16 percentage points finance pensions, (depending on sector and location of
firm). Workers pay 15 percent of gross earnings, of which 11 points are for pensions (as of
November 2003). The ceiling on earnings subject to pension contributions is Arg$ 4,800,
which is not indexed. Pensioners pay social security contributions for sickness benefit of 3
to 6 percent.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 52.3 57.4 62.6 72.9 83.1 93.4
(% of average earnings) 43.2 46.3 49.4 55.6 61.8 68.0
Net pension level 62.3 68.0 73.7 85.1 96.4 107.8
(% of average net earnings) 52.3 55.7 59.2 66.0 72.9 79.7
Gross replacement rate 104.6 76.6 62.6 48.6 41.6 37.4
(% of individual earnings) 86.4 61.7 49.4 37.1 30.9 27.2
Net replacement rate 119.2 89.3 73.7 57.8 50.3 45.7
(% of individual net earnings) 100.0 73.2 59.2 44.8 38.0 33.8
Gross pension wealth 7.1 7.8 8.5 9.8 11.2 12.6
(multiple of average earnings) 8.2 8.8 9.4 10.6 11.8 13.0
Net pension wealth 8.4 9.2 10.0 11.5 13.0 14.6
(multiple of average net earnings) 10.0 10.6 11.3 12.6 13.9 15.2
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
LATIN AMERICA AND THE CARIBBEAN 161
Argentina
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC basic DC basic
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total pensioner: income tax basic
Source: Axia Economics APEX model.
Chile
WORKERS IN CHILE ARE REQUIRED TO CONTRIBUTE TO A PRIVATELY MANAGED, defined-contri-
bution scheme. There is also a guaranteed minimum pension financed from the central
budget. Finally, there is a separate social-assistance pension
Qualifying Conditions
There is no minimum retirement age. Withdrawal of accumulated balances is conditional
upon being able to buy an annuity of at least 110 percent of the prevailing minimum pen-
sion or 50 percent of the worker's own average earnings over the last 10 years.
For the minimum pension guarantee, there is a pension eligibility age of 65 for men and
60 for women. Also, 20 years' contributions are required to qualify. Periods of unemploy-
ment can count for up to three years toward the 20-year requirement.
Benefit Calculation
Defined Contribution
The contribution to the individual account that serves exclusively as retirement savings is
10.0 percent of gross salary. Additional charges amounting to about 2.3 percent of wages
cover commissions and insurance for death and disability; these charges have been paid
by contributors in recent years. There are no asset-based charges. As of the end of 2002,
participants could choose from five different kinds of investment portfolios, subject to
some limitations. Several withdrawal options are available, although, for comparison, the
modeling assumes that benefits are taken as a price-indexed annuity at the age at which
the member qualifies for the minimum pension benefit.
Targeted
The minimum pension guarantee is set by the government on an ad hoc basis. In the past
five years, its value has oscillated between 20 and 25 percent of average covered wages.
Personal Income Tax and Social Security Contributions
Neither contributions nor investment returns are taxable. Pensions considered income are
subject to taxation and to a 7 percent health insurance tax. The personal income tax sched-
ule is as follows:
Band lower limit Ch$ (000s) 0 3,423 10,269 17,114 30,806 41,075
Rate (%) 0 5 10 15 25 35
In addition to paying roughly 12.30 percent of gross salary for old age and survivor's
and disability pensions, employees pay 7.00 percent of earnings for health insurance.
Employers pay 0.95 percent of payroll plus up to 6.80 percent for work-injury coverage,
162
LATIN AMERICA AND THE CARIBBEAN 163
according to risk, as well as 4.11 percent for severance allowances. As of January 2003, the
ceiling on earnings subject to pension contributions has been 60 Unidades de Fomento (UF)
or US$ 1,414. The UF is a price-indexed monetary unit, but otherwise, the ceiling is not
indexed.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 22.4 32.8 43.8 65.7 87.5 109.4
(% of average earnings) 22.4 22.4 27.1 40.6 54.1 67.7
Net pension level 28.0 40.4 53.5 78.8 103.4 126.7
(% of average net earnings) 28.0 28.0 33.5 49.7 65.8 81.0
Gross replacement rate 44.9 43.8 43.8 43.8 43.8 43.8
(% of individual earnings) 44.9 29.9 27.1 27.1 27.1 27.1
Net replacement rate 53.3 52.6 53.5 54.5 56.3 58.5
(% of individual net earnings) 53.3 36.5 33.5 34.4 35.8 37.4
Gross pension wealth 3.2 4.7 6.2 9.3 12.5 15.6
(multiple of average earnings) 4.4 4.4 5.3 7.9 10.6 13.2
Net pension wealth 4.0 5.8 7.6 11.2 14.7 18.0
(multiple of average net earnings) 5.5 5.5 6.6 9.7 12.9 15.9
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
164 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Chile
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC minimum DC minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total pensioner: income tax minimum
Source: Axia Economics APEX model.
Colombia
THE NEW SYSTEM IN COLOMBIA PROVIDES A CHOICE between a public, defined-benefit
scheme and a funded, privately managed, defined-contribution scheme. There is also an
option to switch from one scheme to the other periodically. For a new entrant, a minimum
pension is guaranteed with 25 years' contributions.
Qualifying Conditions
Normal retirement age rises gradually to 57 for women and 62 for men by 2014 for the
public, defined-benefit scheme. It is currently 60 for women and 62 for men in the private
scheme (unless the accumulated balance is enough for an annuity of 110 percent of the
minimum pension). The minimum contribution period is increasing to 1,300 weeks (or 25
years) from 2015.
Benefit Calculation
Earnings-Related
From 2004, the pension is between 55 and 65 percent of average individual earnings over
the final 10 years, revalued by inflation plus 2.0 percentage points for each of four 50-week
periods (up to 85 percent). If the earnings base equals the minimum wage, the replacement
rate is 65 percent, with a 0.5 percentage point reduction for each multiple of minimum
wage to a minimum of 55 percent.
Targeted
The minimum pension is equivalent to the minimum wage. (In 2002, the minimum wage
was equivalent to roughly half of the estimated average covered wage.) There are 14
monthly payments per year (including two bonuses).
Defined Contribution
Individuals choosing the funded option contribute 13.5 percent of gross earnings, rising to
16.5 percent (of which the employee pays one-quarter.) By the year 2008, 12.0 percent of
gross earnings will be destined for the individual account, while 3.0 percent will go to
finance commissions and insurance premiums. An additional 1.5 percent finances the
minimum pension guarantee fund. Workers can switch back to the pay-as-you-go scheme
once every 5 years but cannot do so within 10 years of retirement. The minimum pension
guarantee is the same as that which applies in the defined-benefit scheme but is paid only
12 times during the year.
Personal Income Tax and Social Security Contributions
Contributions and investment returns are not taxed; pension payments count as taxable
income, but only when total income exceeds 50 times the minimum wage. The personal
income tax schedule is
165
166 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Band lower limit (Col$ million) 0 18.2 18.7 27.4 72.8
Rate (%) 0 10 20 30 35
Employers pay social security contributions of 23.5 to 31.8 percent of gross earnings
(excluding severance fund contributions), of which 10.125 percent finances pensions. This
is scheduled to rise to 12.375 percent by 2008. Employees pay 7.375 percent of gross earn-
ings, of which 3.375 percent is for pensions (rising to 4.125 percent by 2008). There is an
additional 1 percent solidarity contribution on earnings above four times the minimum
wage. The ceiling is 20 times the minimum wage. Pensioners do not pay social security
contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 50.0 50.0 50.0 69.1 92.2 115.2
(% of average earnings) 50.0 50.0 50.0 50.0 57.8 72.3
Net pension level 54.4 54.4 54.4 75.3 100.3 125.4
(% of average net earnings) 54.4 54.4 54.4 54.4 63.0 78.7
Gross replacement rate 100.0 66.7 50.0 46.1 46.1 46.1
(% of individual earnings) 100.0 66.7 50.0 33.3 28.9 28.9
Net replacement rate 108.8 72.6 54.4 50.2 50.2 50.3
(% of individual net earnings) 108.8 72.6 54.4 36.3 31.5 31.6
Gross pension wealth 7.4 7.4 7.4 10.2 13.6 17.0
(multiple of average earnings) 9.9 9.9 9.9 9.9 11.5 14.3
Net pension wealth 8.0 8.0 8.0 11.1 14.8 18.5
(multiple of average net earnings) 10.8 10.8 10.8 10.8 12.5 15.6
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men
LATIN AMERICA AND THE CARIBBEAN 167
Colombia
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC targeted DC targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setar 1.00
ent
pension
1.5 mecalper 0.75
relative 1.0 ss 0.50
gro
gross
0.5
and andten0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
etar
income 0.4
0.75
and
0.3 placementer 0.50
earnings 0.2
of netfo
n
0.25
0.1
proportion proportio
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total targeted
Source: Axia Economics APEX model.
Costa Rica
ALL WORKERS IN COSTA RICA PARTICIPATE IN THE PUBLIC, defined-benefit scheme. Lower-
income workers have the option to split their contributions evenly between a defined-con-
tribution scheme and the defined-benefit scheme. Higher-income workers must split their
contributions between the two schemes. There is a separate social-assistance pension.
Qualifying Conditions
Retirement is possible at age 59 and 11 months for women and 61 and 11 months for men
if they have contributed for 450 or 462 months, respectively. The contribution requirement
is reduced for each month so that retirement is possible at age 65 for both sexes after 240
months of contribution. The social-assistance program targeted to the elderly is based on a
means test.
Benefit Calculation
Earnings-Related
The target replacement rate for pensions is 60 percent of individual earnings after the first
240 months' coverage plus 1 percentage point per year thereafter. The earnings base is the
best 48 out of the last 60 months' pay. Earnings are not revalued for the purposes of this
calculation. Pensions in payment are indexed to prices.
Targeted
The minimum pension has been set recently at approximately 20 percent of average cov-
ered earnings, while the social-assistance pension has been set at about 10 percent of
average earnings.
Defined Contribution
Contributions equivalent to 4.25 percent of gross wage are made to individual accounts for
all covered workers. A commission is deducted from this flow with a maximum of either 8
percent of returns or 4 percent of contributions. Disability and survivor's benefits are
paid from the public scheme. Benefits may be taken as indexed annuities or scheduled
withdrawals.
Personal Income Tax and Social Security Contributions
Employer contributions are tax deductible. However, the 1 percent employee contribution
to the funded scheme is not deductible. Investment returns are not taxed. Benefits are
taxed as income. The personal income tax schedule is
Band lower limit C (000s) 0 296 445
Rate (%) 0 10 15
168
LATIN AMERICA AND THE CARIBBEAN 169
Employers pay a total of 27.00 percent gross wages for social insurance and the mandatory
severance program, while the employee pays 11.75 percent. There is no ceiling on the
wages subject to contributions. Pensioners do not pay social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 44.5 66.7 89.0 133.5 178.0 222.5
(% of average earnings) 41.8 62.7 83.5 125.3 167.1 208.8
Net pension level 54.5 78.8 103.1 151.7 200.3 248.9
(% of average net earnings) 51.5 74.3 97.1 142.7 188.4 234.0
Gross replacement rate 89.0 89.0 89.0 89.0 89.0 89.0
(% of individual earnings) 83.5 83.5 83.5 83.5 83.5 83.5
Net replacement rate 102.9 103.0 103.1 103.1 103.2 103.2
(% of individual net earnings) 97.3 97.2 97.1 97.1 97.0 97.0
Gross pension wealth 7.2 10.8 14.4 21.6 28.8 36.0
(multiple of average earnings) 8.4 12.6 16.7 25.1 33.5 41.9
Net pension wealth 8.8 12.8 16.7 24.6 32.4 40.3
(multiple of average net earnings) 10.3 14.9 19.5 28.6 37.8 46.9
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
170 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Costa Rica
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related
Source: Axia Economics APEX model.
The Dominican Republic
NEW LABOR-MARKET ENTRANTS IN THE DOMINICAN REPUBLIC are obliged to join the new,
funded, and privately managed defined-contribution scheme. A minimum pension guaran-
tee applies after 30 years of contributions at age 60. A social-assistance benefit for the
elderly is also being introduced.
Qualifying Conditions
Workers who have contributed for 30 years can retire at age 60 and are eligible for the min-
imum pension guarantee. Regardless of contribution history, if they have sufficient funds
to purchase an annuity equivalent to at least half of the minimum pension, they may retire
at age 55.
Benefit Calculation
Earnings-Related
The two defined-benefit schemes covering civil servants and formal private sector work-
ers are phased out over time, as all new entrants are required to join the new scheme.
Defined Contribution
Contribution rates will rise over a five-year period. From 2007, employees and employers
will contribute 2.88 percent and 7.12 percent of gross wages, respectively, for old-age, sur-
vivor's, and disability insurance. Of this amount, 8.0 percentage points are destined for
the individual accounts. Insurance premiums are set by law at 1.0 percent of gross wages,
and commissions are capped at 0.5 percent of wages, although charges on returns over a
certain level are permitted. A fee of 0.1 percentage points is levied to finance the specialized
pension fund supervisory agency, and a contribution to the solidarity fund of 0.4 percent is
required. Benefits can be taken as scheduled withdrawals or price-indexed annuities.
Targeted
The minimum pension is equivalent to the lowest minimum wage in the country: approx-
imately 40 percent of the estimated average covered wage.
Personal Income Tax and Social Security Contributions
Contributions and investment returns are not taxed, but pension payments count as tax-
able income. The personal income tax schedule is
Band lower limit RD$ (000s) 0 120 200 300
Rate (%) 0 15 20 25
Employers pay social security contributions of 14.12 percent of gross earnings for health,
pensions, and work injury, while employees pay 5.88 percent. The ceiling for contributions
171
172 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
is 10 minimum wages for health and 20 minimum wages for pensions. The minimum
wage was estimated at approximately 40 percent of projected average covered wage. Pen-
sioners do not pay social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 52.6 52.6 52.6 52.6 58.7 73.4
(% of average earnings) 52.6 52.6 52.6 52.6 52.6 59.9
Net pension level 55.9 55.9 55.9 55.9 62.4 78.0
(% of average net earnings) 55.9 55.9 55.9 55.9 55.9 63.6
Gross replacement rate 105.3 70.2 52.6 35.1 29.4 29.4
(% of individual earnings) 105.3 70.2 52.6 35.1 26.3 23.9
Net replacement rate 111.8 74.6 55.9 37.3 31.6 32.6
(% of individual net earnings) 111.8 74.6 55.9 37.3 28.3 26.5
Gross pension wealth 7.6 7.6 7.6 7.6 8.5 10.6
(multiple of average earnings) 9.3 9.3 9.3 9.3 9.3 10.6
Net pension wealth 8.1 8.1 8.1 8.1 9.0 11.3
(multiple of average net earnings) 9.9 9.9 9.9 9.9 9.9 11.3
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
LATIN AMERICA AND THE CARIBBEAN 173
The Dominican Republic
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC targeted DC targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
1.00
0.5
rate
income
0.4 0.75
and
0.3
replacement 0.50
earnings net
of 0.2 of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total targeted
Source: Axia Economics APEX model.
El Salvador
NEW ENTRANTS IN EL SALVADOR ARE OBLIGED TO JOIN THE NEW, FUNDED, and privately
managed defined-contribution scheme. A minimum pension guarantee requires 25 years
of contributions at minimum retirement age.
Qualifying Conditions
Men that have contributed for 25 years are eligible to retire at age 60 and women at age 55.
After 30 years of contribution, there is no age requirement. Retirement is also allowed if
the account balance is sufficient to purchase an annuity equal to 60 percent of basic earn-
ings or 160 percent of the minimum pension.
Benefit Calculation
Defined Contribution
Employees and employers contribute 6.25 and 6.75 percent, respectively, of which 10 per-
centage points are allocated to individual accounts. Commissions and disability and sur-
vivor's insurance are financed from up to 3 percentage points of the total contribution.
Benefits can be taken as scheduled withdrawals or price-indexed annuities, although
currently the former are only allowed.
Targeted
The minimum pension is set at US$ 100. Eligibility for the minimum pension is achieved
with 25 years of contribution.
Personal Income Tax and Social Security Contributions
Contributions and investment returns are not taxed, but pension payments count as tax-
able income. Wages and pensions are subject to a progressive income tax. Below the lower
limit (US$ 3,800) no tax is due. Beyond that the tax consists of a flat amount plus a rate
levied on income above a certain threshold, as set out in the table:
Band lower limit (US $) Flat payment (US $) Rate on excess (%) Threshold (US $)
3,800 57 10 3,800
5,630 57 10 2,743
9,143 720 20 9,143
22,856 2,743 30 22,856
Employers pay social security contributions of 14.25 percent of gross earnings for
health, pensions, and work injury, while employees pay 9.25 percent. Of this, 13 percentage
points are for pensions. The ceiling is US$ 6,100. It is adjusted on an ad hoc basis.
Pensioners pay 7.80 percent of their pensions for public health insurance.
174
LATIN AMERICA AND THE CARIBBEAN 175
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 32.1 32.1 38.7 58.0 77.4 96.7
(% of average earnings) 32.1 32.1 32.1 35.8 47.7 59.7
Net pension level 32.6 32.6 39.3 58.9 78.6 98.2
(% of average net earnings) 32.6 32.6 32.6 36.4 48.5 60.6
Gross replacement rate 64.1 42.7 38.7 38.7 38.7 38.7
(% of individual earnings) 64.1 42.7 32.1 23.9 23.9 23.9
Net replacement rate 65.1 43.4 39.3 41.2 44.3 44.4
(% of individual net earnings) 65.1 43.4 32.6 25.4 27.4 27.4
Gross pension wealth 4.8 4.8 5.8 8.8 11.7 14.6
(multiple of average earnings) 6.6 6.6 6.6 7.3 9.8 12.2
Net pension wealth 4.9 4.9 5.9 8.9 11.9 14.8
(multiple of average net earnings) 6.7 6.7 6.7 7.4 9.9 12.4
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
176 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
El Salvador
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC targeted DC targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
rates
2.0 1.00
pension
1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income
0.4
and 0.75
0.3
replacement
0.50
earnings
of 0.2 net
of
0.25
0.1
proportion
proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total pensioner: income tax targeted
Source: Axia Economics APEX model.
Mexico
NEW LABOR-FORCE ENTRANTS IN MEXICO ARE OBLIGED TO JOIN THE NEW, funded, and privately
managed defined-contribution scheme. The government contributes 5.5 percent of the 1997
real minimum wage to the individual account. There is also a minimum pension.
Qualifying Conditions
Normal retirement age is 65 for men and 60 for women, subject to 1,250 weeks (approxi-
mately 25 years) of contribution.
Benefit Calculation
Defined Contribution
Workers and employers contribute a total of 6.275 percent of earnings to an individual
account; a government contribution equivalent to 0.225 percent of earnings is added to
that amount. An additional 5.0 percent contribution is made to an individual housing
account (a scheme known as Infonavit), which reverts to the retirement account when it is
not used. Finally, the government contributes 5.5 percent of the 1997 real minimum wage
into all individual retirement accounts.
The calculations assume that the individual converts the accumulated account balance
into a price-indexed annuity at normal pension age. Annuity rates are sex specific.
Minimum
The minimum pension is equivalent to the same 1997 real minimum-wage value and was
estimated to be approximately 23 percent of the average covered wage in 2002. The link to
the real minimum wage means that the minimum pension is effectively price indexed.
Personal Income Tax and Social Security Contributions
The allowance for pensioners is set at nine times the minimum wage in place of the work-
ers' formula based on bonuses and holiday entitlements (no tax is paid on pensions up to
this level). There are no reliefs for pension income over the higher allowance. Pensioners
do not pay social security contributions.
177
178 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 19.6 27.8 36.0 52.4 68.7 85.1
(% of average earnings) 19.4 19.4 21.7 31.6 41.5 51.3
Net pension level 28.1 36.6 45.1 62.1 78.7 95.1
(% of average net earnings) 27.9 27.9 30.4 40.6 50.8 61.1
Gross replacement rate 39.1 37.0 36.0 34.9 34.4 34.1
(% of individual earnings) 38.8 25.9 21.7 21.1 20.7 20.5
Net replacement rate 50.4 46.4 45.1 44.3 44.1 44.2
(% of individual net earnings) 50.1 35.4 30.4 28.9 28.5 28.4
Gross pension wealth 2.6 3.7 4.8 7.0 9.1 11.3
(multiple of average earnings) 3.6 3.6 4.1 5.9 7.8 9.6
Net pension wealth 3.7 4.9 6.0 8.3 10.5 12.6
(multiple of average net earnings) 5.2 5.2 5.7 7.6 9.5 11.5
Source: OECD pension models.
Note: Results in italics are for women where the results of women are different from those of men.
LATIN AMERICA AND THE CARIBBEAN 179
Mexico
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC DC-fixed DC DC-fixed
targeted targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setar 1.00
ent
pension
1.5 mecalper 0.75
relative 1.0 ss 0.50
gro
gross
0.5
and andten 0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.2 1.00
rate
income 0.1
0.75
and
0
replacement 0.50
earnings �0.1 net
of of
0.25
�0.2
proportion�0.3 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total DC-fixed targeted
Source: OECD pension models.
Peru
THE DEFINED-CONTRIBUTION PENSION SCHEME IN PERU is an option for new labor-market
entrants as well as for current workers. The minimum pension for people taking the funded
option has not yet been established.
Qualifying Conditions
The standard pension age for both men and women is 65. The vesting requirement is 20
years' contributions.
Benefit Calculation
Targeted
The minimum pension, as currently legislated, does not apply to younger workers. How-
ever, there appears to be a general expectation that this will be extended to younger
cohorts in due course. The value of the scheme is currently 415 pesos per month, equiva-
lent to approximately a quarter of average covered earnings.
Defined Contribution
The contribution rate to the funded scheme is 8.00 percent. In addition, there are contribu-
tions of 2.27 percent and 1.23 percent on average, respectively, for insurance and charges.
Personal Income Tax and Social Security Contributions
Contributions and returns on individual account balances are exempted from tax. There is
a general allowance of 1,560 pesos per month. The income tax schedule is based on multi-
ples of tax reference units (UITs), which are 0, 27, and 54. This converts into annual income
as follows:
Band lower limit S/. (000s) 0 83.7 167.4
Rate (%) 15 21 30
The total employee contribution for pensions is 13.5 percent (split, as set out above).
There are no further employee social security contributions. For sickness and maternity,
employers pay 9.0 percent, and pensioners, 4.0 percent. For work injury, the employer con-
tribution varies between 1.0 and 12.2 percent, according to risk in the relevant industry.
180
LATIN AMERICA AND THE CARIBBEAN 181
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 24.7 29.3 39.1 58.6 78.2 97.7
(% of average earnings) 24.7 25.7 34.2 51.3 68.4 85.5
Net pension level 27.8 32.9 43.9 65.9 87.8 109.0
(% of average net earnings) 27.8 28.8 38.4 57.7 76.9 96.1
Gross replacement rate 49.4 39.1 39.1 39.1 39.1 39.1
(% of individual earnings) 49.4 34.2 34.2 34.2 34.2 34.2
Net replacement rate 54.8 43.4 43.9 46.4 47.8 48.3
(% of individual net earnings) 54.8 38.0 38.4 40.7 41.9 42.6
Gross pension wealth 3.2 3.7 5.0 7.5 10.0 12.5
(multiple of average earnings) 3.6 3.7 5.0 7.5 10.0 12.5
Net pension wealth 3.5 4.2 5.6 8.4 11.2 13.9
(multiple of average net earnings) 4.0 4.2 5.6 8.4 11.2 14.0
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
182 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Peru
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC targeted DC targeted
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total pensioner: income tax targeted
Source: Axia Economics APEX model.
Uruguay
THE PUBLIC, DEFINED-BENEFIT SCHEME IN URUGUAY COVERS earnings up to a specific level.
Lower-income workers can split their contributions evenly between defined-contribution
and defined-benefit schemes. The split for higher-income workers varies with income.
There is a separate social-assistance pension.
Qualifying Conditions
Retirement is allowed at age 60 for both men and women with 35 years of contribution.
Pensions can also be paid to individuals with 15 years of contributions at age 70.
Benefit Calculation
Earnings-Related
The pension is 50.0 percent of the earnings base plus 0.5 percent for each contribution year
above 35 years (up to 2.5 percent). It increases by 3.0 percent for each year retirement is
deferred after age 60 (up to 30.0 percent). The earnings base is the final 10 years' pay
(revalued with average earnings). The ceiling, indexed to average earnings, is approxi-
mately twice average earnings. In the calculation of pensionable earnings, the portion of
pay subject to contributions is multiplied by 1.5 up to the maximum earnings base (10,908
pesos in 2003).
Targeted
The minimum pension, linked to the minimum wage, is worth approximately 20 percent
of average earnings. From age 70, an individual with 15 years' contributions qualifies for
an advanced age pension and a higher minimum pension.
Defined Contribution
On earnings below the maximum base, the contribution is 7.5 percent of earnings up to
half the maximum base and 7.5 percent on half of pay below half the maximum base. On
earnings between 1.0 and 1.5 times the maximum base, the contribution is 7.5 percent on
half of pay up to the maximum base. For these workers, the entire 15 percent contribution
on income between 1.0 and 1.5 times the maximum base goes to the earnings-related
scheme. On earnings above 1.5 times the maximum base, the whole contribution (up to the
ceiling on taxable earnings) goes to the individual account. For workers with individual
accounts, the contribution to the funded scheme covers disability and survivor's insur-
ance as well as commissions for private providers. Over the past few years, this has cost
about 2.7 percent of covered wage. Benefits must be taken as price-indexed annuities.
183
184 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Personal Income Tax and Social Security Contributions
Contributions and investment returns are exempt. The income tax is 2 percent on
incomes above three times the minimum wage and 3 percent above six times. The
minimum wage was approximately 17 percent of average earnings in 2002. The progressive
tax schedule is
Band lower limit (minimum wages) 20 30 40 50
Rate (%) 3 4 5 8
Employers contribute at least 22.5 percent, while employees pay 18.0 percent. The ceiling
is 32,725 pesos per month (2003) or 5.7 times average covered earnings. It is indexed to
average earnings.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 51.3 77.0 102.6 135.8 145.6 145.6
(% of average earnings) 49.0 73.5 98.0 128.8 136.8 136.8
Net pension level 63.3 94.4 125.4 165.5 177.4 177.4
(% of average net earnings) 60.5 90.2 119.8 157.1 166.8 166.8
Gross replacement rate 102.6 102.6 102.6 90.5 72.8 58.2
(% of individual earnings) 98.0 98.0 98.0 85.9 68.4 54.7
Net replacement rate 125.1 125.3 125.4 110.8 89.5 71.8
(% of individual net earnings) 119.5 119.7 119.8 105.2 84.2 67.5
Gross pension wealth 8.3 12.4 16.6 21.9 23.5 23.5
(multiple of average earnings) 9.7 14.6 19.5 25.6 27.2 27.2
Net pension wealth 10.2 15.2 20.2 26.7 28.6 28.6
(multiple of average net earnings) 12.0 17.9 23.8 31.2 33.1 33.1
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
LATIN AMERICA AND THE CARIBBEAN 185
Uruguay
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
DC earnings-related DC earnings-related
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions DC
pensioner: total earnings-related
Source: Axia Economics APEX model.
13. Middle East and North Africa
187
Algeria
ALGERIA HAS AN EARNINGS-RELATED PUBLIC SCHEME with a minimum pension that covers
both public and private sectors.
Qualifying Conditions
The normal pension age is 60 for men and 55 for women. The contribution condition is
15 years for men and 10 years for women. Earlier retirement is available for veterans and
for people in arduous or hazardous occupations. The pension age for women is reduced
by one year for each child they have raised, to a maximum of three children. Pension
receipt is subject to a retirement test.
Early retirement is possible at 50 for men and 45 for women, subject to 14 years of
employment for women and 20 years of employment for men.
Finally, people may retire at any age with 32 years of contributions.
Benefit Calculation
Earnings-Related
The accrual rate is 2.5 percent of earnings per year of coverage. The earnings measure is
the final five years of pay. There is no valorization of earlier years' earnings. There is a
maximum replacement rate of 80 percent (achieved after 32 years of contributions).
There is a maximum pension (15 times the minimum wage or DA 150,000) and a ceiling
on pensionable earnings.
There is a reduction of 1 percent for each year that the pension is claimed earlier than
the legal retirement age.
There is a requirement that the value of pensions in payment be reviewed annually, but
there is no formal indexation procedure.
Minimum
There is a minimum pension worth 75 percent of the minimum wage, which in 2002 was
equivalent to DA 7,500 per month.
Personal Income Tax and Social Security Contributions
The income tax schedule is shown below. Employees' social security contributions are
deductible against the personal income tax. Pension benefits are taxable.
Band lower limit DA 0 10,000 15,000 30,000 70,000 100,000
Rate (%) 0 5 10 15 20 25
Total social security contributions are 34.5 percent of gross earnings, of which 25
percentage points are paid by employers and the remainder by employees. Of the total
189
190 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
contribution, 16 percentage points go toward financing pensions, 4 points go toward
unemployment insurance, and the balance covers health insurance. There is no ceiling on
earnings subject to social security contributions. The contribution rates are the same for
national and public sector schemes. Pensioners do not pay social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 40.0 60.0 80.0 120.0 160.0 200.0
(% of average earnings)
Net pension level 47.4 68.2 89.1 130.8 172.4 214.1
(% of average net earnings)
Gross replacement rate 80.0 80.0 80.0 80.0 80.0 80.0
(% of individual earnings)
Net replacement rate 89.6 89.3 89.1 88.8 88.7 88.7
(% of individual net earnings)
Gross pension wealth 7.8 11.7 15.7 23.5 31.3 39.1
(multiple of average earnings) 8.6 13.0 17.3 25.9 34.6 43.2
Net pension wealth 9.3 13.3 17.4 25.6 33.7 41.9
(multiple of average net earnings) 10.2 14.7 19.2 28.3 37.3 46.3
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
MIDDLE EAST AND NORTH AFRICA 191
Algeria
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
Bahrain
BAHRAIN HAS AN EARNINGS-RELATED SCHEME WITH A MINIMUM PENSION.
Qualifying Conditions
Retirement is possible at different ages depending on the number of years of contribu-
tions. The normal pension age in the scheme for private sector workers is 60 for men and
55 for women. There is a contribution condition of 15 years for men and 10 years for
women to retire at the normal pension age. Early retirement is possible from age 45 with 20
years of contributions for men and 15 years for women. Pension receipt is subject to
retirement from the current job. Earnings plus pension receipt must not exceed previous
earnings.
Benefit Calculation
Earnings-Related
The pension value is 2.2 percent of earnings for each year of contributions. There is a max-
imum replacement rate of 80 percent, normally reached after 36 years' contributions.
The earnings measure is average pay in the two years before retirement. There is an
additional credit of five years of coverage for retirement after age 60, subject to a maxi-
mum accrual of 30 years.
There is no ceiling on pensionable earnings. Pensions in payment are adjusted ad hoc.
Minimum
There is a minimum pension of 150 dinars per month.
Personal Income Tax and Social Security Contributions
There is no personal income tax in Bahrain.
Employees contribute 5 percent, and employers contribute 7 percent for pensions.
Employers pay an additional 3 percent for the work-injury scheme. There is no ceiling on
earnings subject to contributions. Pensioners do not pay social security contributions.
192
MIDDLE EAST AND NORTH AFRICA 193
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 42.0 59.4 79.2 118.8 158.4 198.0
(% of average earnings) 42.0 57.8 77.0 115.5 154.0 192.5
Net pension level 44.2 62.5 83.4 125.1 166.7 208.4
(% of average net earnings) 44.2 60.8 81.1 121.6 162.1 202.6
Gross replacement rate 84.0 79.2 79.2 79.2 79.2 79.2
(% of individual earnings) 84.0 77.0 77.0 77.0 77.0 77.0
Net replacement rate 88.4 83.4 83.4 83.4 83.4 83.4
(% of individual net earnings) 88.4 81.1 81.1 81.1 81.1 81.1
ross pension wealth 7.7 10.9 14.5 21.7 29.0 36.2
(multiple of average earnings) 9.0 12.4 16.5 24.8 33.0 41.3
Net pension wealth 8.1 11.4 15.3 22.9 30.5 38.1
(multiple of average net earnings) 9.5 13.0 17.4 26.1 34.8 43.5
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
194 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Bahrain
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setar 1.00
ent
pension
1.5 mecalper 0.75
relative 1.0 ss 0.50
gro
gross
0.5
and andten 0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers d. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement
0.50
earnings net
0.2
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
Djibouti
SEPARATE PROGRAMS COVER PRIVATE AND PUBLIC SECTOR WORKERS, but the parameters and
rules have been partially harmonized between the two programs. There is also a minimum
pension.
Qualifying Conditions
The normal pension eligibility age under the national scheme is 55 for both men and
women. The number of years of contributions required has recently been increased. Thus,
people born after 1951 need 25 years' contributions, while those born in 1946 or before
require only 15 years'. During the phased introduction of this reform, the number of
contribution years increases by two years per year. For people not meeting the vesting
requirement, it is intended that they will be able to retire at 55 or later with a reduced
pension. However, the regulations have not yet been issued. Retirement on medical
grounds is possible from age 50.
Benefit Calculation
Earnings-Related
The accrual rate has been changed recently and will fall from 2.0 percent (up to the end of
2001) to 1.5 percent (2006 onward). In the interim, the accrual rate is 1.8 percent. There is a
maximum replacement rate of 81 percent of earnings.
The earnings measure is the average over the last 10 years. There is a legal requirement
to valorize earlier years' earnings according to an index specified by the government.
However, again, no regulations have been issued. The modeling therefore assumes that
these earlier years' earnings are valorized in line with the growth of average earnings.
There is no ceiling on pensionable earnings.
Indexation of pensions in payment is discretionary.
Minimum
There is a minimum pension of DF 170,000 per year.
Personal Income Tax and Social Security Contributions
Pension contributions are deductible against the personal income tax. Pensions in pay-
ment are taxable. For incomes between DF 25,000 and DF 30,000 per year, the tax liability
is DF 500. Thereafter, there is a schedule as follows:
Band lower limit DF (000s) 30 50 150 600
Rate (%) 15 18 20 30
195
196 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
For private sector employees, total contributions are 19.7 percent of earnings, of which 8
percentage points are for pensions. These contributions are split 50�50 between employees
and their employers. Pensioners do not pay social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 21.3 28.1 37.5 56.3 75.0 93.8
(% of average earnings)
Net pension level 25.3 32.9 43.4 64.3 85.2 103.5
(% of average net earnings)
Gross replacement rate 42.5 37.5 37.5 37.5 37.5 37.5
(% of individual earnings)
Net replacement rate 48.7 42.8 43.4 44.7 45.3 44.6
(% of individual net earnings)
Gross pension wealth 4.2 5.6 7.4 11.1 14.8 18.5
(multiple of average earnings) 4.4 5.8 7.8 11.7 15.6 19.5
Net pension wealth 5.0 6.5 8.6 12.7 16.8 20.4
(multiple of average net earnings) 5.2 6.8 9.0 13.4 17.7 21.5
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
MIDDLE EAST AND NORTH AFRICA 197
Djibouti
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setartn 1.00
pension 1.5 0.75
placemeer
relative 1.0 0.50
ossrg
gross
0.5
and dnaten 0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
The Arab Republic of Egypt
EGYPT HAS AN EARNINGS-RELATED SCHEME that covers both public and private sectors
along with a minimum pension.
Qualifying Conditions
The basic wage pension is available from age 60 subject to 120 months (10 years) of
contributions. Early retirement is possible at any age when 20 years of contributions are
reached, subject to an actuarial decrement. These qualifying conditions also apply to the
variable wage pension. Lump-sum payouts are made at age 60 to people who do not qualify
for the pension.
Benefit Calculation
Earnings-Related
The basic wage pension covers earnings up to LE 8,100 per year. The pension is 1/45th
(2.2 percent) of earnings, with higher accrual rates for periods in arduous or hazardous
work. The earnings measure is the average pay in the last two years. Maximum coverage
is 36 years, giving a maximum replacement rate of 80 percent. (Contribution years beyond
36 earn a lump sum of 15 percent of basic wage.) There is an additional bonus of 25 percent
of the basic wage pension, subject to a minimum of LE 20 and a maximum of LE 35 per
month. Early retirement, conditional on 20 years' contributions, is subject to adjustments:
Pension age <45 45�49 50�54 55+
Reduction (%) 15 10 5 0
The variable wage pension covers earnings above LE 8,100 per year and variable remu-
neration, such as bonuses and commissions, up to LE 6,000 per year. This gives an overall
ceiling of LE 14,100 per year. The accrual rate is 1/45th of earnings. However, the earn-
ings measure is the lifetime average of nominal earnings. For variable wage pensions
claimed before age 60, the pension is reduced by 5 percent per year. The earnings measure
is increased by 2 percent per year of contributions (an ad hoc alternative to valorization).
At baseline assumptions for price and earnings growth, this reduces pensions to 66 percent
of their value under a policy of full valorization to earnings. There is no legal require-
ment to adjust pensions in payment, but the basic wage pension is increased annually.
Recent rises were 20 percent in 1987, 15 percent per annum in 1988�91, 20 percent in 1992, and
10 percent per annum in 1993�2004.
Minimum
The minimum pension is LE 105 per month for civil servants and LE 45 per month for
others (covering both basic and variable wage pensions). The minimum is not reduced for
early retirement. The maximum pension is LE 900 per month.
198
MIDDLE EAST AND NORTH AFRICA 199
Personal Income Tax and Social Security Contributions
Pensions are not subject to personal income tax. There is a general deduction of LE 2,000 per
year for single taxpayers plus an additional allowance of LE 2,000 per year, for earnings.
The schedule applied after these allowances is
Band lower limit (LE) 0 2,500 7,000 16,000
Rate (%) 20 27 35 40
Contributions for pensions by employees are 12 percent of basic wages and 10 percent
of variable wages. For employers, the rates are 18 and 15 percent, respectively. Employee
social security contributions are deductible under the personal income tax. The govern-
ment contributes 1 percent of payroll and covers any deficit. Pensioners do not pay social
security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 45.3 65.3 85.3 112.8 127.1 127.1
(% of average earnings)
Net pension level 63.6 91.7 119.8 158.5 178.6 178.6
(% of average net earnings)
Gross replacement rate 90.5 87.0 85.3 75.2 63.6 50.9
(% of individual earnings)
Net replacement rate 117.5 118.3 119.8 104.8 90.5 73.5
(% of individual net earnings)
Gross pension wealth 7.8 11.3 14.7 19.5 21.9 21.9
(multiple of average earnings) 8.7 12.5 16.4 21.7 24.4 24.4
Net pension wealth 11.0 15.8 20.7 27.4 30.8 30.8
(multiple of average net earnings) 12.2 17.6 23.0 30.4 34.3 34.3
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
200 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
The Arab Republic of Egypt
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
variable-wage basic-wage variable-wage basic-wage
bonus bonus
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setartn 1.00
pension 1.5 0.75
placemeer
relative 1.0 0.50
ossrg
gross
0.5
and dnaten0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion 0 proportion 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions variable-wage
pensioner: total basic-wage bonus
Source: Axia Economics APEX model.
The Islamic Republic of Iran
THE ISLAMIC REPUBLIC OF IRAN HAS AN EARNINGS-RELATED public scheme with a minimum
pension.
Qualifying Conditions
Under the national scheme, the pension may be claimed at any age once 30 years' contri-
butions have accrued. With fewer years' contributions, the pension may be claimed at 60 by
men and 55 by women, subject to a minimum of 10 years' contributions. For 20�25 years'
coverage in a hazardous or arduous occupation, the pension age is 50 for men and 45 for
women. Pension receipt is subject to a retirement test.
Benefit Calculation
Earnings-Related
Pension accrues at 3.3 percent of earnings per year of contributions. There is a minimum
replacement rate of 50 percent (normally reached at 15 years) and a maximum of 116 percent
(reached after 35 years). The earnings measure in the benefit formula is the pay in the final
two years before retirement without adjustment for price inflation or earnings growth.
There is a ceiling on covered earnings of eight times average earnings.
Indexation of pensions in payment is discretionary.
Minimum
There is also a minimum pension amount equal to the minimum wage, which is approxi-
mately two-thirds of average earnings or 850,000 rials.
Personal Income Tax and Social Security Contributions
There is a general income tax allowance of 19.2 million rials. Income above this level is
taxed at a 10 percent rate. Social security contributions are not deductible for income tax
purposes. Pensions in payment are not subject to tax.
Under the national scheme, employees pay 7 percent of earnings, and employers, 20
percent for pensions. Employers also pay an additional 3 percent of earnings for unem-
ployment benefits. The government contributes 3 percent of earnings. There is a floor
(equal to the minimum wage of 696,460 rials) and a ceiling (of 2,507,400 rials) on both
contributions and pensionable earnings.
201
202 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 66.0 86.6 115.5 173.3 231.0 250.0
(% of average earnings)
Net pension level 71.0 93.1 124.2 186.3 248.4 310.5
(% of average net earnings)
Gross replacement rate 132.0 115.5 115.5 115.5 115.5 115.5
(% of individual earnings)
Net replacement rate 141.9 124.2 124.2 126.5 129.5 131.3
(% of individual net earnings)
Gross pension wealth 12.0 15.7 20.9 31.4 41.8 52.3
(multiple of average earnings) 13.2 17.3 23.1 34.6 46.1 57.6
Net pension wealth 12.9 16.9 22.5 33.7 45.0 56.2
(multiple of average net earnings) 14.2 18.6 24.8 37.2 49.6 62.0
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
MIDDLE EAST AND NORTH AFRICA 203
The Islamic Republic of Iran
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
Jordan
JORDAN HAS AN EARNINGS-RELATED PUBLIC SCHEME WITH A MINIMUM PENSION. The separate
schemes for public sector workers are closed to new entrants who are covered by the
national scheme.
Qualifying Conditions
The normal pension age is 60 for men and 55 for women, subject to 180 months (15 years)
of coverage or 60 months (five years) of actual contributions. An early pension may be
claimed from age 45 with 18 years' contributions (men) or 15 years' (women). People with
incomplete contribution histories may pay between the normal pension age and 65 or 60
(men or women) to complete their record, provided they have already reached 10 years'
coverage. There is provision for lump-sum payments for people who do not qualify for a
pension. Early pensions are subject to an actuarial reduction (see below).
Benefit Calculation
Earnings-Related
Pension accrues at 2.5 percent of earnings per year of contributions. The earnings measure
is average (nominal) pay in the last two years before retirement. The earnings measure is
adjusted upward to 1.2 times initial earnings (if final pay is below this level) and downward
to 1.6 times initial earnings (if it exceeds this ceiling). There is a maximum replacement
rate of 75 percent, normally reached after 30 years' contributions. There is a reduction for
early retirement, which for women is
Pension age 45�49 50�54 55+
Reduction (%) 10 5 0
For men the reductions are larger:
Pension age 45�46 47 48 49 50�60
Reduction (%) 18 16 14 12 1 per year
Both pensions in payment and the value of the minimum pension are subject to dis-
cretionary uprating: there is no automatic indexation procedure. There is no ceiling on
pensionable earnings.
Minimum
There is a minimum pension that is equal to the minimum wage, 960 dinars per year in
2003.
204
MIDDLE EAST AND NORTH AFRICA 205
Personal Income Tax and Social Security Contributions
Employee social security contributions are deductible against the personal income tax.
Pensions in payment are not subject to tax. There is no general allowance or basic relief,
and the income tax schedule is as follows:
Band lower limit (dinars) 0 2,000 6,000 12,000
Rate (%) 5 10 20 25
For pensions, employees contribute 5.5 percent and employers, 7.0 percent. Employers
pay 2.0 percent for the work-injury program.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 34.8 50.6 67.5 101.3 135.0 168.8
(% of average earnings) 35.6 53.4 71.3 106.9 142.5 178.1
Net pension level 39.2 57.1 76.1 114.2 152.2 190.3
(% of average net earnings) 40.2 60.3 80.4 120.5 160.7 200.9
Gross replacement rate 69.6 67.5 67.5 67.5 67.5 67.5
(% of individual earnings) 71.3 71.3 71.3 71.3 71.3 71.3
Net replacement rate 77.5 75.2 76.1 77.2 77.7 78.7
(% of individual net earnings) 79.4 79.4 80.4 81.5 82.0 83.1
ross pension wealth 7.3 10.7 14.2 21.4 28.5 35.6
(multiple of average earnings) 8.2 12.4 16.5 24.7 32.9 41.2
Net pension wealth 8.3 12.0 16.1 24.1 32.1 40.2
(multiple of average net earnings) 9.3 13.9 18.6 27.9 37.1 46.4
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
206 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Jordan
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
Libya
LIBYA HAS AN EARNINGS-RELATED PUBLIC SCHEME WITH A MINIMUM PENSION.
Qualifying Conditions
The normal pension age is 65 for men and 60 for women. Vesting is immediate: there is no
requirement for minimum years of contributions. Early retirement is possible from age 62
for men in the private sector.
Benefit Calculation
Earnings-Related
The accrual rate is 2.5 percent per year for the first 20 years and 2.0 percent thereafter to a
maximum replacement rate of 80 percent, normally reached after 35 years' contributions.
There is no actuarial adjustment for early retirement. The earnings measure is the average
over the final three years. There is no ceiling on pensionable earnings. There is no legal
requirement to adjust the value of pensions in payment.
Minimum
There is a minimum pension of 80 percent of the minimum wage. The latter is 85 dinars
per month, giving a minimum pension of 68 dinars per month.
Personal Income Tax and Social Security Contributions
There is a general personal allowance in the income tax, which is 480 dinars for a single
person (higher for married people and for those with children). The rate schedule after this
allowance is as follows:
Band lower limit (dinars) 0 1,800 3,000 4,800 6,600 8,400
Rate (%) 8 10 15 20 25 35
There is an additional Jihad tax on taxable incomes. This has three rates (1, 2, and 3
percent). Pensioners are not subject to income tax.
The total contribution for social security programs is 15 percent of gross earnings. The
employee pays 25 percent of this total; the employer, 70 percent; and the government,
the balance of 5 percent. Of the 15.0 percentage-point total, 10.5 percentage points finance
pensions, with the remainder going to other programs. Pensioners do not pay social
security contributions.
207
208 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 40.0 60.0 80.0 120.0 160.0 200.0
(% of average earnings)
Net pension level 45.6 68.4 91.2 136.8 182.4 228.0
(% of average net earnings)
Gross replacement rate 80.0 80.0 80.0 80.0 80.0 80.0
(% of individual earnings)
Net replacement rate 89.0 90.2 91.2 93.6 96.1 98.8
(% of individual net earnings)
Gross pension wealth 5.6 8.4 11.2 16.9 22.5 28.1
(multiple of average earnings) 7.7 11.6 15.5 23.2 30.9 38.6
Net pension wealth 7.4 11.2 14.9 22.3 29.8 37.2
(multiple of average net earnings) 10.2 15.5 20.6 30.6 40.9 51.1
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
MIDDLE EAST AND NORTH AFRICA 209
Libya
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
Morocco
MOROCCO HAS AN EARNINGS-RELATED NATIONAL SCHEME WITH A MINIMUM PENSION. Three
separate schemes cover civil servants, the military, and contractual, public-sector workers.
Qualifying Conditions
The pension-eligibility age under both national and civil service schemes is 60 for both
men and women.
Early retirement is possible at age 55, but the employer must pay the pension between
ages 55 and 60. (This early pension, since it requires employers to provide voluntarily the
pension, is not modeled.) There is also a lower pension-eligibility age for miners under the
national program. Pension receipt is subject to a retirement test. The qualifying contribu-
tion period for a pension is 3,240 days of contributions. Based on the 216 days, which qual-
ify as a single year for contribution purposes (see below), this is equivalent to a 15-year
vesting period.
Benefit Calculation
Earnings-Related
The pension is 50 percent of earnings once the contribution condition is met plus 1 percent
of earnings for each 216 days above the minimum. This implies an accrual rate of 3.33 percent
for the first 15 years of coverage. There is a maximum replacement rate of 70 percent,
which is reached after 35 years' contributions. The earnings measure is the average pay
during the last three or five years, whichever is higher. There is no valorization of earlier
years' earnings. The ceiling on pensionable earnings is 6,000 dirhams per month. Pensions
in payment are adjusted periodically. However, there is no formal indexation policy.
Minimum
There is a minimum pension of 500 dirhams per month.
Personal Income Tax and Social Security Contributions
Social security contributions are deductible against the personal income tax. There is a
general relief against earned income, meaning that only 83 percent of wages are subject to
the income tax. Similarly, only 60 percent of pension income is taxable. The personal
income tax schedule is
Band lower limit (dirhams) 0 20,000 24,000 30,000 60,000
Rate (%) 0 13 21 25 44
The total contribution for the private sector pension scheme is 20.39 percent, of which
11.89 percent goes toward pensions. Of the total, 16.10 points are paid by the employer,
and 4.29 points, by the employee. Pensioners do not pay social security contributions.
210
MIDDLE EAST AND NORTH AFRICA 211
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 35.0 52.5 70.0 105.0 140.0 152.6
(% of average earnings)
Net pension level 37.5 56.2 74.1 107.0 138.9 150.4
(% of average net earnings)
Gross replacement rate 70.0 70.0 70.0 70.0 70.0 61.1
(% of individual earnings)
Net replacement rate 72.6 72.6 74.1 75.2 75.8 68.1
(% of individual net earnings)
Gross pension wealth 5.1 7.7 10.3 15.4 20.5 22.4
(multiple of average earnings) 6.7 10.1 13.5 20.2 26.9 29.4
Net pension wealth 5.5 8.2 10.9 15.7 20.4 22.0
(multiple of average net earnings) 7.2 10.8 14.3 20.6 26.7 28.9
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
212 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Morocco
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related earnings-related
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 rates
1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross
0.5 and 0.25
and
net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income 0.4
0.75
and
0.3
replacement 0.50
earnings 0.2 net
of of
0.25
0.1
proportion proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
Tunisia
TUNISIA HAS ONE PUBLIC SECTOR AND FOUR PRIVATE SECTOR SCHEMES with earnings-related
pensions plus a minimum pension.
Qualifying Conditions
The normal pension age in the national scheme is 60, subject to 120 months (10 years) of
contributions for the full benefit. Retirement at 50 is possible for people in arduous
occupations, subject to unemployment conditions, or mothers of three or more children.
Other workers may also retire at 50 if they have 360 months (30 years) of contributions.
A proportionally reduced pension is paid to people with between 60 and 120 months of
coverage (that is, at least five years). There are lump-sum payments for workers with
fewer than 60 months' (five years') contributions at age 60 or above.
Benefit Calculation
Earnings-Related
The pension value is 40 percent of earnings plus 0.5 percent for each quarter of contribu-
tions beyond 120 months (10 years), equivalent to an accrual rate of 4 percent per year for
the first 10 years and 2 percent per year thereafter. The earnings measure is the average
over the final 10 years, valorized in line with price inflation. There is a maximum replace-
ment rate of 80 percent, normally reached after 30 years' contributions. The maximum
pension is six times the minimum wage, which is 13,236 dinars per year. Early pensions
are subject to an actuarial reduction of 0.5 percent per quarter that the pension is paid
before age 60. The proportionally reduced partial pension has a minimum pension of half
of the minimum wage, giving a value of 1,103 dinars. Pensions in payment are indexed to
the minimum wage, which is assumed to increase in line with average earnings.
Minimum
There is a minimum pension of two-thirds of the minimum wage relevant to workers cov-
ered by this scheme. The latter was 2,206 dinars per year, giving a minimum pension of
1,470 dinars.
Personal Income Tax and Social Security Contributions
Pension benefits are subject to tax, but there is an abatement of 25 percent. Social security
contributions are deductible under the personal income tax. Furthermore, 10 percent of
earnings are exempted from tax. The income tax schedule is
213
214 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
Band lower limit (dinars) 0 1,500 5,000 10,000 20,000 50,000
Rate (%) 0 15 20 25 30 35
In the private sector scheme, contributions total 12.50 percent of gross earnings, of which
the employer pays 9.75 percent and the employee, 2.75 percent. Pensioners do not pay
social security contributions.
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 32.0 48.0 64.0 96.0 128.0 160.0
(% of average earnings)
Net pension level 38.3 55.5 72.7 107.0 139.9 172.8
(% of average net earnings)
Gross replacement rate 64.0 64.0 64.0 64.0 64.0 64.0
(% of individual earnings)
Net replacement rate 73.1 72.8 72.7 73.5 73.4 73.9
(% of individual net earnings)
Gross pension wealth 9.0 13.5 18.0 27.0 36.0 45.0
(multiple of average earnings) 11.3 17.0 22.7 34.0 45.4 56.7
Net pension wealth 10.8 15.6 20.4 30.1 39.3 48.6
(multiple of average net earnings) 13.6 19.7 25.7 37.9 49.6 61.3
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
MIDDLE EAST AND NORTH AFRICA 215
Tunisia
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related minimum earnings-related minimum
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels
2.0 setar 1.00
nte
pension
1.5 mecalper 0.75
relative 1.0 ss 0.50
gro
gross
0.5
and ndaten0.25
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
e
m etar
ncoi 0.4
0.75
and
gsninrae 0.3 placementer 0.50
0.2
of netfo
n
onitroporp 0.25
0.1
proportio
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total minimum
Source: Axia Economics APEX model.
The Republic of Yemen
THE REPUBLIC OF YEMEN HAS AN EARNINGS-RELATED NATIONAL SCHEME with separate
programs for civil servants and the uniformed services.
Qualifying Conditions
The pension under the national scheme may be claimed at any age once 30 years' contri-
butions have accrued for men and 25 years' for women. For 25 years' contributions, the
pension age is 50 for men. For 20 years' contributions, women may retire at age 46. With
15 years' contributions, the pension may be claimed at 60 by men and 55 by women.
Benefit Calculation
Earnings-Related
The accrual rate is 2.5 percent of earnings for each year of service. There is a maximum
replacement rate of 100 percent. The earnings measure is the average pay over the final two
years. There is no minimum pension under this scheme. There is no ceiling on pensionable
earnings. There is no legal requirement to adjust the value of pensions in payment.
Personal Income Tax and Social Security Contributions
Pension benefits are subject to tax. Social security contributions are deductible against the
personal income tax. This is the income tax schedule:
Band lower limit (rials) 0 3,000 7,000 22,000
Rate (%) 0 10 15 20
In the national pension program, employers contribute 9 percent of earnings for
pensions, and employees pay 6 percent. Employers pay an additional 4 percent for the
work-injury plan. Pensioners are not liable for social security contributions.
216
MIDDLE EAST AND NORTH AFRICA 217
Pension Modeling Results
Individual earnings, multiple of average
Results 0.5 0.75 1 1.5 2 2.5
Gross pension level 50.0 75.0 100.0 150.0 200.0 250.0
(% of average earnings) 43.8 65.6 87.5 131.3 175.0 218.8
Net pension level 53.9 80.1 106.3 158.7 211.1 263.5
(% of average net earnings) 47.3 70.3 93.2 139.0 184.9 230.8
Gross replacement rate 100.0 100.0 100.0 100.0 100.0 100.0
(% of individual earnings) 87.5 87.5 87.5 87.5 87.5 87.5
Net replacement rate 106.2 106.3 106.3 106.3 106.3 106.3
(% of individual net earnings) 93.3 93.2 93.2 93.2 93.1 93.1
Gross pension wealth 6.7 10.0 13.4 20.1 26.8 33.5
(multiple of average earnings) 7.6 11.4 15.2 22.9 30.5 38.1
Net pension wealth 7.2 10.7 14.2 21.2 28.3 35.3
(multiple of average net earnings) 8.2 12.2 16.2 24.2 32.2 40.2
Source: Axia Economics APEX model.
Note: Results in italics are for women where the results of women are different from those of men.
218 PENSIONS PANORAMA: RETIREMENT-INCOME SYSTEMS IN 53 COUNTRIES
The Republic of Yemen
a. Gross pension level b. Gross replacement rate
2.5 1.25
2.0 1.00
level
rate
1.5 0.75
pension
1.0 0.50
replacement
relative
0.5 gross 0.25
gross
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
earnings-related earnings-related
c. Gross and net pension levels d. Gross and net replacement rates
2.5 1.25
levels rates
2.0 1.00
pension 1.5 0.75
replacement
relative 1.0 0.50
gross
gross 0.5 and 0.25
and net
net 0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual earnings, proportion of average individual earnings, proportion of average
net gross net gross
e. Taxes paid by pensioners and workers f. Sources of net replacement rate
0.5 1.00
rate
income
0.4
and 0.75
0.3
replacement
0.50
earnings
of net
0.2
of
0.25
0.1
proportion
proportion
0 0
0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0
individual pension and earnings, proportion of average earnings individual earnings, proportion of average
worker: total worker: income tax taxes and contributions earnings-related
pensioner: total
Source: Axia Economics APEX model.
References
Keenay, G., and E. R. Whitehouse. 2002a. "Taxing Pensioners." In Taxing Wages. Paris:
OECD. 2003.
------. 2002b. "The Role of the Personal Tax System in Old-Age Support: A Survey of 15
Countries." Discussion Paper 02/07, Centre for Pensions and Superannuation, Uni-
versity of New South Wales, Sydney.
------. 2003a. "Financial Resources and Retirement in Nine OECD Countries: The Role of
the Tax System." Social, Employment, and Migration Working Paper 8, OECD, Paris.
------. 2003b. "The Role of the Personal Tax System in Old-Age Support: A Survey of 15
Countries." Fiscal Studies 24 (1): 1�21.
Mattil, B., and E. R. Whitehouse. Forthcoming. "Individual Incentives to Switch between
Public and Private Pension Schemes." Social, Employment, and Migration Working
Paper, OECD, Paris.
OECD (Organisation for Economic Co-operation and Development). 2003. Taxing Wages.
Paris: OECD.
------. 2005. Pensions at a Glance: Public Policies across OECD Countries. Paris: OECD.
Palacios, R. J., and E. R. Whitehouse. 2006. "Civil-Service Pension Schemes Around the
World." Pension Reform Series, Social Protection Discussion Paper No. 0602, World
Bank, Washington, DC.
Queisser, M., and E. R. Whitehouse. 2006. "Comparing the Pension Promises of 30 OECD
Countries." International Social Security Review 59 (3): 49�77.
Robalino, D., E. R. Whitehouse, et al. 2005. Pensions in Middle East and North Africa: Time for
Change. Washington, DC: World Bank.
Vordring, H., and K. Goudswaard. 1997. "Indexation of Public Pension Benefits on a Legal
Basis: Some Experiences in European Countries." International Social Security Review 50
(3): 31�44.
Weaver, R. K. 1988. Automatic Government: The Politics of Indexation. Washington, DC:
Brookings Institution.
Whitehouse, E. R. 2000. "Administrative Charges for Funded Pensions: Measurement
Concepts, International Comparison, and Assessment." Journal of Applied Social Science
Studies 120 (3): 311�61.
------. 2001. "Administrative Charges for Funded Pensions: Comparison and Assessment
of 13 Countries." In Private Pension Systems: Administrative Costs and Reforms, Private
Pensions Series. Vol. 3. Paris: OECD.
------. 2002. "Pension Systems in 15 Countries Compared: The Value of Entitlements."
Discussion Paper 02/04, Centre for Pensions and Superannuation, University of New
South Wales, Sydney.
219
Index
Figures, notes, and tables are indicated by f, n, and t, respectively.
A Libya, 207
accident compensation corporation levy, 101 links to GDP, 21
accrual rates, 11�12, 14�18t3.1�3.4 Luxembourg, 95
Algeria, 189 Spain, 110
Bahrain, 192 the Republic of Yemen, 216
Djibouti, 195 age
the Arab Republic of Egypt, 198 age-based tax allowances, 24
Estonia, 136 age credit, 63
Finland, 68 and contribution rate, 9
Greece, 77 age eligibility, 13, 15, 16
Hungary, 139 Algeria, 189
Iceland, 80 Argentina, 159
the Islamic Republic of Iran, 201 Australia, 53
Japan, 89 Austria, 56
Jordan, 204 Bahrain, 192
Korea, 92 Belgium, 59
Libya, 207 Bulgaria, 127
Luxembourg, 95 Canada, 62
Morocco, 210 Chile, 162
the Netherlands, 98 Colombia, 165
Norway, 104 Croatia, 130
Portugal, 107 the Czech Republic, 133
the Slovak Republic, 151 Denmark, 65
Spain, 110 Djibouti, 195
Tunisia, 213 the Dominican Republic, 171
the Republic of Yemen, 216 the Arab Republic of Egypt, 198
actuarial factors, 27, 30 El Salvador, 174
Bulgaria, 127 Estonia, 136
Korea, 92 France, 71
Italy, 86 Germany, 74
Tunisia, 213 Greece, 77
adequacy, vs. insurance, 39, 43�44 Hungary, 139
adjustments, 77 Iceland, 80
Austria, 56 the Islamic Republic of Iran, 201
the Czech Republic, 133 Ireland, 83
earnings-related schemes, 22�23t3.6 Italy, 86
the Islamic Republic of Iran, 201 Japan, 89
Jordan, 204 Jordan, 204
221
222 INDEX
Korea, 92 B
Latvia, 142 Bahrain, 192�94
Libya, 207 basic pension schemes, 5, 39, 41
Lithuania, 145 adjustments of, 24
Luxembourg, 95 Argentina, 159�61
Mexico, 177 Canada, 62�64
Morocco, 210 the Czech Republic, 133�35
the Netherlands, 98 Denmark, 65�67
New Zealand, 101 Eastern Europe and Central Asia, 6t2.1
Norway, 104 Estonia, 136�38
Peru, 180 high-income OECD countries, 6t2.1
Poland, 148 Iceland, 80�82
Portugal, 107 Ireland, 83�85
the Slovak Republic, 151 Japan, 89�91
Spain, 110 Latin America and the Caribbean, 6t2.1
Sweden, 113 Latvia, 145�47
Switzerland, 116 Luxembourg, 95�97
Tunisia, 213 Middle East and North Africa, 7t2.1
Turkey, 154 the Netherlands, 98�100
the United Kingdom, 119 New Zealand, 101�03
the United States, 122 Norway, 104�06
the Republic of Yemen, 216 the United Kingdom, 119�21
See also residency requirements; vesting See also first-tier, redistributive schemes
requirements basic universal benefit (PBU), Argentina, 159
aggregate taxable income (ATI), Belgium, 60 Belgium, 59�61
Algeria, 189�91 benefit calculations
annual pension-insurance coefficient, 136 Algeria, 189
annuities, 27 Argentina, 159
Bulgaria, 127 Australia, 54
Chile, 162 Austria, 56
Costa Rica, 168 Bahrain, 192
the Dominican Republic, 171 Belgium, 59�61
El Salvador, 174 Bulgaria, 127
Germany, 75 Canada, 62
Latvia, 143 Chile, 162
Mexico, 177 Colombia, 165
Poland, 148 Costa Rica, 168
Switzerland, 116 Croatia, 130
Arbeidsmarkedets Till�gspension (ATP), 65 Denmark, 65�66
arduous occupations the Dominican Republic, 171
Algeria, 189 El Salvador, 174
the Arab Republic of Egypt, 198 Finland, 68�70
Greece, 77 France, 71�72
the Islamic Republic of Iran, 201 Greece, 77�78
Tunisia, 213 Hungary, 139�41
Argentina, 159�61 Iceland, 80�81
ARRCO scheme, France, 71 the Islamic Republic of Iran, 201
asset-based charges, 162 Ireland, 83
assets test, 83 Italy, 86
ATI. See aggregate taxable income (ATI) Japan, 89
ATP. See Arbeidsmarkedets Till�gspension (ATP) Latvia, 142�44
Australia, 53�55 Lithuania, 145
Austria, 56�58 Morocco, 210
average replacement rate, 31, 33 the Netherlands, 98
INDEX 223
New Zealand, 101 charges, Peru, 182
Norway, 104 Chile, 162�64
Poland, 148 civil service
Spain, 110 the Dominican Republic, 171
Sweden, 113 Morocco, 210
Turkey, 154 wage index, 23, 23t3.6
the United Kingdom, 119 the Republic of Yemen, 216
the United States, 122 Colombia, 165�67
Uruguay, 183 commissions
the Republic of Yemen, 216 Chile, 162
bonuses, Mexico, 177 Colombia, 165
Bulgaria, 127�29 Costa Rica, 168
the Dominican Republic, 171
C El Salvador, 174
Canada, 62�64 Uruguay, 183
ceiling on benefits compound-interest effect, 21
Canada, 62 consumer price index, 154
Spain, 110 contributions
the United States, 122 as parameter of pension systems, 24
ceiling on contributions ceilings on, 174, 201
El Salvador, 174 See also taxes and social security
the Islamic Republic of Iran, 201 contributions
ceiling on earnings, 12, 13, 34, 42 contribution sociale generalis�e (CSG), 72
Algeria, 189 Costa Rica, 168�70
Austria, 56 Croatia, 130�32
Belgium, 59 CSG. See contribution sociale generalis�e (CSG)
Canada, 62 the Czech Republic, 133�35
Croatia, 130
Estonia, 136, 137 D
Finland, 68 DB. See defined-benefit (DB) schemes
France, 71 DC. See defined-contribution (DC) schemes
Germany, 74 death insurance, Chile, 162
Greece, 77 defined-benefit (DB) schemes, 6�7t2.1, 8, 12,
Hungary, 139 44, 45
Iceland, 80 Argentina, 159�61
the Islamic Republic of Iran, 201 Austria, 56�58
Japan, 89 Colombia, 165�67
Jordan, 204 Costa Rica, 168�70
Korea, 92 Iceland, 80�81
Latvia, 142 link between pension and earnings, 41, 42
Libya, 207 the Netherlands, 98�100
Lithuania, 145 Spain, 113�15
Morocco, 210 Uruguay, 183�85
the Netherlands, 98 defined-contribution (DC) schemes, 6�7t2.1, 8,
Norway, 104 11, 13, 44, 45
Poland, 148 Argentina, 159�61
the Slovak Republic, 151 Australia, 53�55
Spain, 110 Bulgaria, 127�29
Sweden, 113 Chile, 162�64
Turkey, 154 Colombia, 165�67
the United Kingdom, 119 Costa Rica, 168�70
the United States, 122 Croatia, 130
Uruguay, 183 Denmark, 65�66
the Republic of Yemen, 216 El Salvador, 174�76
224 INDEX
Estonia, 136 adjustments of pensions in payment,
Hungary, 139�41 22�23t3.6
Iceland, 80�81 Algeria, 189�91
Latvia, 142�43 Argentina, 159�61
and link between pension and earnings, 39, Austria, 56�58
41�42 Bahrain, 192�94
Lithuania, 145�47 Belgium, 59�61
Mexico, 177�79 Bulgaria, 127�29
and modeling, 27 Canada, 62�64
Peru, 180�82 Colombia, 165�67
Poland, 148�50 Costa Rica, 168�70
the Slovak Republic, 151�53 Croatia, 130�32
Sweden, 113�15 the Czech Republic, 133�35
Uruguay, 183�85 defining earnings, 16, 17, 18, 20�21
defined-credit schemes, 9 Djibouti, 195�97
Denmark, 65�67 the Dominican Republic, 171�73
disability insurance earnings measure and valorization, 19�20t3.5
Belgium, 60 the Arab Republic of Egypt, 198�200
Chile, 162 Estonia, 136�38
Costa Rica, 168 Finland, 68�70
the Dominican Republic, 171 France, 71�73
El Salvador, 174 Germany, 74�76
Portugal, 108 Greece, 77�79
Uruguay, 183 Hungary, 139�41
Djibouti, 195�97 the Islamic Republic of Iran, 201�03
the Dominican Republic, 171�73 Italy, 86�88
Japan, 89�91
E Jordan, 204�06
earnings Korea, 92�94
average earnings, 31�34 Latvia, 142�44
calculation of average earnings, 27 Libya, 207�09
defining of, 16, 17, 18, 20�21 link between pensions and earnings, 39�42
high earners, 32t5.1, 34, 37, 123, 168 Lithuania, 145�47
link to pensions, 4, 39�42, 43�44 Luxembourg, 95�97
See also ceiling on earnings; earnings-related Morocco, 210�12
schemes; low earners the Netherlands, 98�100
earnings measures, 18�21 Norway, 104�06
Austria, 56 Poland, 148�50
Bahrain, 192 Portugal, 107�09
Belgium, 59�61 the Slovak Republic, 151�53
Canada, 62�63 Spain, 110�12
Denmark, 65 Sweden, 113�15
Djibouti, 195 Switzerland, 116�18
the Arab Republic of Egypt, 198 Tunisia, 213�15
the Islamic Republic of Iran, 201 Turkey, 154�56
Jordan, 204 Uruguay, 183�85
Korea, 92 the Republic of Yemen, 216�18
Libya, 207 Eastern Europe and Central Asia
lifetime average earnings measures, 18, 20 country studies, 127�56
Morocco, 210 earnings measure and valorization, 20t3.5
Portugal, 107�09 first-tier, redistributive schemes, 6t2.1, 7, 44
Tunisia, 213 gross replacement rates by earnings level, 31,
the Republic of Yemen, 216 32t5.1
earnings-related schemes minimum pension plans, 6t2.1
INDEX 225
net pension entitlements, 35�38 France, 71�73
net replacement rates, 36t6.1 franchise and franchising, 33, 98
parameters of pension systems, 16t3.2 free area, 53
private vs. public sector pension
provision, 44 G
procedures for adjustment of pensions in GDP. See gross domestic product (GDP)
payment, 22t3.6, 23 general social tax (CSG), France, 72
second-tier, earnings-related schemes, 6t2.1, Germany, 74�76
7, 45 Greece, 77�79
targeted pension plans, 6t2.1 gross domestic product (GDP), adjustments
See also names of specific countries; specific linked to, 21
pension scheme Italy, 86
effective accrual rates, 12 Turkey, 154
the Arab Republic of Egypt, 198�200 gross pension levels. See pension modeling
elderly care insurance, 89 results
eligibility age. See age eligibility gross pension wealth. See pension modeling
El Salvador, 175�76 results
end-of-year allowances, Luxembourg, 95 gross replacement rates, 21, 35, 43
entitlements by earnings level, 31�34
overview, 31�34 See also pension modeling results;
under today's rules, 25 replacement rates
See also specific pension scheme guaranteed income supplements, Canada,
Estonia, 136�38 62�64
European Commission, 4 g-value, 142, 143
European Union, 4
H
F hazardous occupations
federal income tax, the United States, 122�23 Algeria, 189
Finland, 68�70 the Arab Republic of Egypt, 198
first-tier, redistributive schemes, 5�7, 39 Greece, 77
adequacy vs. insurance, 43�44 the Islamic Republic of Iran, 201
designing of, 44 health insurance
Eastern Europe and Central Asia Algeria, 190
parameters, 16t3.2 Belgium, 69
high-income OECD countries parameters, Chile, 162
11�12, 14t3.1 El Salvador, 174
Latin America and the Caribbean Germany, 74, 75
parameters, 17t3.3 Japan, 89
Middle East and North Africa parameters, the Netherlands, 99
18t3.4 Poland, 149
See also basic pension schemes; minimum high earners, 32t5.1, 34
pension schemes; social assistance; Costa Rica, 168
targeted pension schemes net pension entitlements, 37
flat-rate schemes, 34 the United States, 123
Argentina, 159�61 Uruguay, 183
Canada, 62�64 high-income OECD countries
Estonia, 136�38 country studies, 53�124
Japan, 89�91 earnings measure and valorization, 19t3.5
Lithuania, 145�47 first-tier, redistributive schemes, 6t2.1, 7, 44
Luxembourg, 95�97 gross replacement rates by earnings level, 31,
the Netherlands, 98�100 32t5.1
New Zealand, 101�03 link between pensions and earnings, 39,
Norway, 104�06 40ff7.1a�7.1d
the United Kingdom, 119�21 minimum pension plans, 6t2.1
226 INDEX
net pension entitlements, 35�38 Switzerland, 116
net replacement rates, 36t6.1 Tunisia, 213
pension system parameters, 11�12, Turkey, 154
14�15t3.1 Uruguay, 183, 184
private vs. public sector pension See also, price indexation
provision, 44 individual accounts, 26, 127�29
procedures for adjustment of pensions in Industrins och handelns till�ggspension (ITP),
payment, 21, 22t3.6, 24 113�14
second-tier, earnings-related schemes, 6t2.1, inflation
8�9, 45 Colombia, 165
targeted pension plans, 6t2.1 and indexation, 21, 22t3.6
See also names of specific OECD countries; and targeted pension schemes, 107�08
specific pension schemes See also price inflation
holiday entitlements, Mexico, 177 Infonavit, 177
Holzmann, Robert, 3�4 information technology, 17�18
housing accounts, Mexico, 177 insurance, 5
Hungary, 139�41 Peru, 180
premiums, 165
I vs. adequacy, 39, 43�44
Iceland, 80�82 See also specific pension scheme; specific type of
income taxes. See taxes; taxes and social security insurance
contributions insurance premiums, Colombia, 165
income-tested schemes, 5 interest rates
Austria, 56�58 notional nominal interest rate, 65
Canada, 62�64 Switzerland, 116
Denmark, 65�67 investment portfolios, Chile, 162
Finland, 68�70 the Islamic Republic of Iran, 201�03
Greece, 78 Ireland, 83�85
Iceland, 80�82 Italy, 86�88
Norway, 104�06 ITP. See Industrins och handelns till�ggspension
Sweden, 113�15 (ITP)
Switzerland, 116�18
Turkey, 154�56 J
the United Kingdom, 119�21 Japan, 89�91
indexation, 21�24 Jihad tax, 207
Algeria, 189 Jordan, 204�06
Argentina, 160
Australia, 53 K
Belgium, 59 Korea, 92�94
Croatia, 130
the Czech Republic, 133 L
Denmark, 65 Latin America and the Caribbean
Djibouti, 195 country studies, 159�85
Hungary, 139 earnings measure and valorization, 20t3.5
the Islamic Republic of Iran, 201 first-tier, redistributive schemes, 6t2.1,
Jordan, 204 17t3.3, 44
Latvia, 142 gross replacement rates by earnings level, 31,
Luxembourg, 95 32�33t5.1
Morocco, 210 net pension entitlements, 35�38
the Netherlands, 98 net replacement rates, 36�37t6.1
Norway, 104 private vs. public sector pension
Portugal, 107 provision, 44
the Slovak Republic, 151 procedures for adjustment of pensions in
Sweden, 114�15 payment, 23t3.6
INDEX 227
second-tier, earnings-related schemes, 6t2.1, net replacement rates, 36�37t6.1
8, 17t3.3, 44 and target replacement rates, 43
targeted pension plans, 6t2.1 maternity contributions, Peru, 180
See also names of specific countries; specific maximum pension schemes
pension scheme Algeria, 189�91
Latvia, 142�44 Bulgaria, 127�29
length of service, 12 the Arab Republic of Egypt, 198�200
Libya, 207�09 the Slovak Republic, 151�53
life expectancy, 148 means-tested schemes, 5, 33
Finland, 68 Australia, 53�55
Italy, 86 Austria, 56�58
Latvia, 142 Belgium, 59�61
Sweden, 113 Finland, 68�70
lifetime average earnings measures, 18, 20 Ireland, 83�85
Lithuania, 145�47 Portugal, 107�09
living arrangements, and pension benefits, Spain, 110�12
101 Turkey, 154�56
long-term care contributions the United States, 122�24
Germany, 74, 75 Mexico, 177�79
Luxembourg, 96 Middle East and North Africa
low earners, 31�34 country studies, 189�218
Austria, 56�58 earnings measure and valorization, 20t3.5
Costa Rica, 168 first-tier, redistributive schemes, 7t2.1, 44
Denmark, 65�67 gross replacement rates by earnings level, 31,
Ireland, 83 33t5.1
net pension entitlements, 37 minimum pension plans, 6t2.1, 7t2.1
the Slovak Republic, 151 net pension entitlements, 35�38
Switzerland, 116 net replacement rates, 37t6.1
the United States, 122�24 parameters of pension systems, 18t3.4
Uruguay, 183 private vs. public sector pension
lump-sum payments provision, 44
the Arab Republic of Egypt, 198 procedures for adjustment of pensions in
Jordan, 204 payment, 23, 23t3.6
Tunisia, 213 second-tier, earnings-related schemes, 7t2.1, 8
Luxembourg, 95�97 targeted pension plans, 7t2.1
See also names of specific countries; specific
M pension schemes
mandatory occupational schemes Mig. See minimum income guarantee (Mig)
France, 71�73 military workers, Morocco, 210
the Netherlands, 98 miners, Morocco, 210
Switzerland, 116�18 minimum income guarantee (Mig), the United
See also occupational schemes Kingdom, 119�21
mandatory pension schemes minimum pension schemes, 5, 7, 39, 44
Australia, 53�55 Algeria, 189�91
Bulgaria, 127�29 Bahrain, 192�94
Croatia, 130�32 Belgium, 59�61
Estonia, 136�38 Bulgaria, 127�29
France, 71�73 Chile, 162�64
gross replacement rates by earnings level, Colombia, 165, 165�67
32�33t5.1, 45t1 Costa Rica, 168�70
Hungary, 139�41 Croatia, 130�32
Iceland, 80�82 the Czech Republic, 133�35
Latvia, 142�44 Djibouti, 195�97
Lithuania, 145�47 the Dominican Republic, 171�73
228 INDEX
Eastern Europe and Central Asia, 6t2.1 net pension entitlements, 4, 35�38
the Arab Republic of Egypt, 198�200 See also pension modeling results
El Salvador, 174�76 net pension wealth. See pension modeling
France, 71 results
Greece, 77�78 net replacement rates, 35
high-income OECD countries, 6t2.1 by earnings level, 36�37t6.1
Hungary, 139 See also pension modeling results;
the Islamic Republic of Iran, 201�03 replacement rates
Jordan, 204�06 New Zealand, 101�03
Latin America and the Caribbean, 6t2.1 noncontributory schemes, 78
Latvia, 142 Norway, 104�06
Libya, 207�09 notional-account schemes, 8, 11�12, 21, 45
Luxembourg, 95�97 Italy, 86�88
Mexico, 177�79 Latvia, 142�44
Middle East and North Africa, 7t2.1 and mortality data, 27
Morocco, 210�12 Poland, 148�50
Peru, 180�82 Sweden, 113�15
Poland, 148�50 notional interest rate, 86, 148
Portugal, 107�09 notional nominal interest rate, 65
the Slovak Republic, 151
Spain, 110�12 O
Tunisia, 213�15 occupational schemes, 8, 12, 18, 33, 44
Turkey, 154 France, 71�73
Uruguay, 183�85 Iceland, 80�82
mixed indexation, 21 Ireland, 83�85
mixed systems the Netherlands, 98�100
Croatia, 130�32 Sweden, 113�15
Hungary, 139 Switzerland, 116�18
modeling pensions, 3�4 OECD. See Organization for Economic
and average earnings, 27 Co-operation and Development
calculations for full-career, single workers, 25 (OECD)
coverage, 25�26 old-age security, 62
defined-contribution schemes, 27 Organization for Economic Co-operation and
economic variables, 26�27 Development (OECD), 3�4
future entitlements under today's rules, 25 See also high-income OECD countries; names
indicators and results, 28�29 of specific OECD countries
overview, 49�50
and taxes and social security P
contributions, 27�28 parameters of pension systems, 3�24, 28
worked example, 29�30 defined-contribution schemes, 11, 13
See also names of specific countries; pension Eastern Europe and Central Asia, 16t3.2
modeling results high-income OECD countries, 11�12,
Morocco, 210�12 14�15t3.1
mortality and indexation, 21�24
data, 27 Latin America and the Caribbean, 17t3.3
projections in Finland, 68 Middle East and North Africa, 18t3.4
rates in Italy, 86 See also age eligibility; ceiling on earnings;
defined-contribution (DC) schemes;
N first-tier, redistributive schemes;
national schemes second-tier, earnings-related schemes;
Finland, 68�70 taxes and social security contributions
Morocco, 210�12 pay-as-you-go (PAYG) schemes
the Republic of Yemen, 216�18 Argentina, 159�61
the Netherlands, 98�100 Bulgaria, 127�29
INDEX 229
Colombia, 165�67 Portugal, 108�09
Finland, 68�70 the Slovak Republic, 152�53
Hungary, 139�41 Spain, 111�12
Latvia, 142�44 Sweden, 114�15
Lithuania, 145�47 Tunisia, 214�15
PBU. See basic universal benefit (PBU) Turkey, 155�56
Pearson, Mark, 3�4 the United Kingdom, 120�21
pension credit, the United Kingdom, the United States, 123�24
119�21 Uruguay, 184�85
pension fund supervisory agencies, the Republic of Yemen, 217�18
the Dominican Republic, 171 pension-point value, 71, 74
pension modeling results pension report
Algeria, 190�91 future developments, 4
Argentina, 160�61 overview of conclusions, 4
Australia, 54�55 structure of, 3�4
Austria, 57�58 Pensions at a Glance: Public Policies across OECD
Bahrain, 193�94 Countries, 3
Belgium, 60�61 pension schemes
Bulgaria, 128�29 high-income OECD countries, 11�12,
Canada, 63�64 14�15t3.1
Chile, 163�64 international comparisons of, 3
Colombia, 166�67 link between entitlements and
Costa Rica, 169�70 earnings, 4
Croatia, 131�32 link with earnings, 39�42, 43�44
the Czech Republic, 134 structure of, 6�7t2.1
Denmark, 66�67 See also benefit calculations; names of specific
Djibouti, 196�97 countries; specific parameters of schemes;
the Dominican Republic, 172�73 specific pension scheme; taxes and social
the Arab Republic of Egypt, 199�200 security contributions
El Salvador, 175�76 pension wealth, 28, 29, 77
Estonia, 137�38 personal income tax. See taxes; taxes and social
Finland, 69�70 security contributions
France, 72�73 Peru, 180�82
Germany, 75�76 points system, 6�7t2.1, 8, 18, 21, 45
Greece, 78�79 Estonia, 136
Hungary, 140�41 France, 71�73
Iceland, 81�82 Norway, 104
the Islamic Republic of Iran, 202�03 the Slovak Republic, 151�53
Ireland, 84�85 Poland, 148�50
Italy, 87�88 Portugal, 107�09
Japan, 90�91 price indexation, 21, 22t3.6, 24
Jordan, 205�06 Austria, 56
Korea, 93�94 Belgium, 59
Latvia, 143�44 Canada, 62
Libya, 208�10 Chile, 163
Lithuania, 146�47 Costa Rica, 168
Luxembourg, 96�97 Croatia, 130
Mexico, 178�79 El Salvador, 174
Morocco, 211�12 France, 71
the Netherlands, 99�100 Greece, 77
New Zealand, 102�03 Hungary, 139
Norway, 105�06 Italy, 86
Peru, 181�82 Japan, 89
Poland, 149�50 Korea, 92
230 INDEX
Luxembourg, 95�97 public health insurance, El Salvador, 174
Poland, 148 public pension schemes, 12
Portugal, 107 Algeria, 189�91
Sweden, 113 Austria, 56�58
Switzerland, 116 Belgium, 59�61
the United States, 122 Bulgaria, 127�29
Uruguay, 183 Colombia, 165�67
See also indexation Costa Rica, 168�70
price-indexed annuities, 27, 53, 171 Croatia, 130�32
the Dominican Republic, 171 the Czech Republic, 133�35
price inflation Denmark, 65�67
Estonia, 136 Eastern Europe and Central Asia, 6t2.1, 8
Finland, 68 the Arab Republic of Egypt, 198�200
Italy, 86 Estonia, 136�38
the Slovak Republic, 151 Finland, 68�70
Tunisia, 213 Greece, 77�79
private pension schemes, 71 high-income OECD countries, 6t2.1
Argentina, 159�61 Hungary, 139�41
Australia, 53, 53�55 the Islamic Republic of Iran, 201�03
Bulgaria, 127�29 Ireland, 83�85
Chile, 162�64 Japan, 89, 89�91
Colombia, 165�67 Jordan, 204�06
Croatia, 130�32 Korea, 92�94
Djibouti, 195�97 Latin America and the Caribbean,
the Dominican Republic, 171�73 6t2.1, 7
Eastern Europe and Central Asia, 6t2.1 Latvia, 142�44
the Arab Republic of Egypt, 198�200 Libya, 207�09
El Salvador, 174�76 Lithuania, 145�47
Finland, 68�70 Luxembourg, 95�97
high-income OECD countries, 6t2.1 Middle East and North Africa, 7, 7t2.1
Hungary, 139�41 New Zealand, 101�03
Latin America and the Caribbean, 6t2.1 Norway, 104�06
Mexico, 177�79 Poland, 148�50
Middle East and North Africa, 7, 7t2.1 Portugal, 107�09
Morocco, 210�12 the Slovak Republic, 151�53
the Netherlands, 98�100 Spain, 110�12
Tunisia, 213�15 Switzerland, 116�18
the United Kingdom, 119�21 (the) United Kingdom, 119�21
See also public pension schemes; specific Tunisia, 213�15
pension scheme Turkey, 154�56
private sector the United States, 122�24
occupational plans, 80�82 Uruguay, 183�85
role in pension provision, 44 See also private pension schemes; specific
progressive schemes, 12, 23, 39, 42, 43 pension scheme
the Czech Republic, 133 public sector, role in pension provision, 44
El Salvador, 174
and indexation, 23 Q
Korea, 92 qualification points, 127
Norway, 104 qualifying conditions. See age eligibility;
Switzerland, 116 residency requirements; vesting
and taxes, 24, 35 requirements
the United Kingdom, 119 quasi-mandatory occupational schemes
the United States, 122 the Netherlands, 98�100
Uruguay, 183 Sweden, 113�14
INDEX 231
R Latvia, 142
real rate of return, 27, 30n2 Portugal, 107�09
redistributive programs. See first-tier, Turkey, 154�56
redistributive schemes savings credit, the United Kingdom, 119
relative pension levels, 28�29 second-tier, earnings-related schemes, 6�7t2.1,
replacement rates, 4, 28, 39, 43 8�9
Algeria, 189 adequacy vs. insurance, 43�44
and average earnings, 31�34 designing of, 45
average replacement rate, 31, 33 Eastern Europe and Central Asia
Bahrain, 192 parameters, 16t3.2
Belgium, 59�61 France, 71�73
Canada, 62 high-income OECD countries parameters,
Colombia, 165 11�12, 14�15t3.1
Costa Rica, 168, 168�70 Latin America and Caribbean parameters,
the Czech Republic, 133 17t3.3
Djibouti, 195 Middle East and North Africa parameters,
the Arab Republic of Egypt, 198 18t3.4
Finland, 68 overview, 11�12, 14�18t3.1�3.4
France, 71 See also defined-benefit (DB) schemes;
Iceland, 800 defined-contribution (DC) schemes;
the Islamic Republic of Iran, 201 defined-credit schemes; mandatory
Jordan, 204 pension schemes; notional-account
Korea, 92, 93�94 schemes; points system
Libya, 207 severance allowances, Chile, 163
Morocco, 210 sickness contributions
the Netherlands, 98, 99�100 Argentina, 160
Norway, 104 Austria, 57
Sweden, 113�14 Finland, 69
Switzerland, 116 Luxembourg, 96
target replacement rates, 43 Peru, 180
Tunisia, 213 the Slovak Republic, 45n1, 151�53
the United Kingdom, 119 social assistance, 5, 7, 33
the United States, 122 Chile, 162
the Republic of Yemen, 216 Costa Rica, 168�70
See also pension modeling results the Czech Republic, 133
residency requirements the Dominican Republic, 171
Canada, 62 Estonia, 136
Denmark, 65 Germany, 74�76
Finland, 68 Italy, 86�88
Iceland, 80�82 Luxembourg, 95
New Zealand, 101�03 the Netherlands, 98
See also age eligibility; vesting requirements Uruguay, 183
resource-tested benefits, 26, 39, 44 social pensions, Portugal, 107�09
See also means-tested schemes social security
Lithuania, 145
S the United States, 122�24
S2P. See state second pension (S2P) See also taxes and social security
safety-net income, 56 contributions
Belgium, 59 social solidarity benefits and grants, 77
the Czech Republic, 133 social sustainability, 3
Estonia, 136�38 solidarity contributions
Germany, 74�76 Belgium, 60
Greece, 77�79 Colombia, 166
Ireland, 83 the Dominican Republic, 171
232 INDEX
sources of net replacement rate. See Middle East and North Africa, 7t2.1
pension modeling results Norway, 104�06
SP. See special pension (SP) savings schemes Peru, 180�82
Spain, 110�12 Portugal, 107�09
special pension (SP) savings schemes, Denmark, Sweden, 113�15
65�67 Switzerland, 116�18
standards of living Turkey, 154�56
and pension adjustments, 21 the United Kingdom, 119�21
and valorization, 20�21 the United States, 122�24
state second pension (S2P), the United Uruguay, 183�85
Kingdom, 119 target replacement rates, 39, 43
superannuation guarantees, 53�55 taxes
supplemental income impact on net replacement rates, 37
Canada, 52�54 as parameter of pension schemes, 24
Denmark, 65�67 See also pension modeling results; taxes and
Greece, 77 social security contributions
guaranteed income supplements, 62�64 taxes and social security contributions, 24,
Iceland, 80 27�28, 189�90
Switzerland, 116�18 Argentina, 159�61
Turkey, 154�56 Australia, 53�54
the United States, 122 Austria, 56�57
survivor's insurance Bahrain, 192�94
Costa Rica, 168 Belgium, 60
the Dominican Republic, 171 Bulgaria, 127�28
El Salvador, 174 Canada, 63
the Netherlands, 99 Chile, 162�63
Uruguay, 183 Colombia, 165�66
Sweden, 113�15 Costa Rica, 168�69
Switzerland, 116�18 Croatia, 130
system-dependency ratio, 74 the Czech Republic, 134
Denmark, 66
T Djibouti, 195�96
targeted pension schemes, 5, 7, 39, 43�44 the Dominican Republic, 171�72
adjustments of, 24 the Arab Republic of Egypt, 199
Australia, 53�55 El Salvador, 174
Austria, 56�58 Estonia, 137
Belgium, 59�61 Finland, 69
Canada, 62�64 France, 72
Chile, 162�64 Germany, 74�75
Colombia, 165 Greece, 78
Costa Rica, 168�70 Hungary, 140
Denmark, 65�67 Iceland, 81
the Dominican Republic, 171�73 the Islamic Republic of Iran, 201
Eastern Europe and Central Asia, 6t2.1 Ireland, 83�84
El Salvador, 174�76 Italy, 86�87
Estonia, 136�38 Japan, 89
Finland, 68�70 Jordan, 205
France, 71�72 Korea, 92
high-income OECD countries, 6t2.1 Latvia, 143
Iceland, 80�82 Libya, 207
Ireland, 83�85 Lithuania, 145�46
Latin America and the Caribbean, Luxembourg, 95�97
6t2.1 Mexico, 177
INDEX 233
Morocco, 210 universal pension schemes, Canada,
the Netherlands, 99 62�64
New Zealand, 101 Uruguay, 183�85
Norway, 105
Peru, 180
Poland, 149 V
Portugal, 108 valorization
the Slovak Republic, 151 Algeria, 189
Spain, 110 Austria, 56
Sweden, 114 earnings-related schemes, 19�20t3.5
Switzerland, 117�18 the Arab Republic of Egypt, 198
Tunisia, 213�14 France, 71
Turkey, 155 Greece, k, 77
the United Kingdom, 120 Japan, 89
the United States, 122�23 Korea, 92
Uruguay, 184 Morocco, 210
the Republic of Yemen, 216 the Netherlands, 98
See also names of specific countries Portugal, 107
tax-limitation rule, Norway, 105 Tunisia, 213
tax reference units (UITs), Peru, 180 vesting requirements
top-up schemes Algeria, 189
Austria, 56�58 Argentina, 159
Sweden, 113�15 Australia, 53
the United Kingdom, 119 Austria, 56
the United States, 122�24 Bahrain, 192
transformation coefficient, 86 Belgium, 59
Tunisia, 213�15 Bulgaria, 127
Turkey, 154�56 Chile, 162
typology, 3 Colombia, 165�67
overview, 5�7 Costa Rica, 168
See also first tier, redistributive schemes; Croatia, 130
mandatory pension schemes; second the Czech Republic, 133
tier, earnings-related schemes Djibouti, 195
the Dominican Republic, 171�73
U the Arab Republic of Egypt, 198
UITs. See Unidades Impostivitas Tributarias El Salvador, 174
(UITs) Estonia, 136
unemployment insurance France, 71
Algeria, 190 Germany, 74
Chile, 162 Greece, 77
Finland, 69 Hungary, 139
Germany, 75 the Islamic Republic of Iran, 201
the Islamic Republic of Iran, 201 Ireland, 83
Luxembourg, 96 Italy, 86
Tunisia, 213 Japan, 89
Unidades Impostivitas Tributarias (UITs), Jordan, 204
180 Korea, 92
uniform services Latvia, 142
Morocco, 210 Libya, 207
the Republic of Yemen, 216 Lithuania, 145
unisex life tables, 139, 148 Luxembourg, 95
the United Kingdom, 119�21 Mexico, 177
the United States, 122�24 Morocco, 210
234 INDEX
Norway, 104 withdrawals
Peru, 180 Australia, 53
Poland, 148 Canada, 62
Portugal, 107 Chile, 162
the Slovak Republic, 151 Costa Rica, 168
Spain, 110, 113 Denmark, 65, 66
Sweden, 114 the Dominican Republic, 171
Turkey, 154 El Salvador, 174
the United Kingdom, 119 Finland, 68
the United States, 122 Iceland, 80
Uruguay, 183 lump sum, 66
the Republic of Yemen, 216 Sweden, 113
See also age eligibility; residency See also lump-sum payments
requirements with-profit schemes, 65
veterans, Algeria, 189 work-injury coverage
voluntary schemes, 43 Bahrain, 192
Denmark, 65�67 Chile, 162�63
Ireland, 83�85 Peru, 180
the United Kingdom, 119�21 work-related expenses, 149
World Bank, 3�4
W
wage index, 23, 23t3.6 Y
white-collar workers' schemes, Sweden, 113 the Republic of Yemen, 216�18
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T he accurate presentation of a country's pension system and the
comparison of pension systems across countries are crucial parts
of policy analysis and reform. This is equally valid for high-
income countries of the Organisation for Economic Co-operation
and Development as it is for low- and middle-income countries. Pensions
Panorama: Retirement-Income Systems in 53 Countries provides a
compendium of facts and analysis that should inform policy making
and public debate about retirement-income systems around the world.
Reforming pensions is a central policy issue for all countries; it is chal-
lenging and controversial because it involves long-term planning by
governments that face numerous short-term pressures.
In Pensions Panorama, Edward Whitehouse combines painstaking, rigorous
analysis with a clear, easy-to-understand presentation of empirical results.
While the author does not advocate any particular kind of pension system
or type of pension reform, the analysis presented can inform debates on
retirement-income systems. A core concern is social sustainability, which
involves the future adequacy of pension benefits, the impact of pension
reforms on income distribution among older people, and the means to
combat old-age poverty. Pensions Panorama is a useful resource for policy
makers, government officials, and others involved in pension reform.
ISBN 0-8213-6764-1