Gross replacement rates: Public vs Private, Mandatory vs Voluntary schemes
Private pensions play a significant role in over one-third of OECD countries. For mandatory schemes, the OECD average for gross replacement rates of an average earner from public schemes alone is 42%, compared with 52% with private pensions included. For the nine OECD countries where voluntary private pensions are widespread the average replacement rate is 56% for an average earner choosing to contribute for the whole career, while it is 58% – which is also the total OECD average – when Israel and Mexico are also included compared with 38% when only mandatory schemes are considered. If the full-career average-wage earner only starts contributing in a voluntary scheme from age 45, the replacement rate is 43% on average among these nine countries.
Table 4.2 shows the interplay between mandatory public, mandatory private and voluntary pension schemes. As shown in the previous indicator, the average replacement rate from mandatory schemes for a full-career average earner is equal to 52%: for the 17 OECD countries where the calculations of entitlements only cover mandatory public pensions, the average replacement rate for an average worker earner is 60%; for the 10 OECD countries with both public and mandatory private provision but no voluntary, the average replacement rate is 53%; and for the last 11 countries with significant voluntary pensions, the replacement rate from the mandatory component alone is 38%.
Mandatory private pensions
Mandatory private pensions exist in 12 countries including Denmark, the Netherlands, Sweden and the United Kingdom where private pensions have near-universal coverage, and are described as “quasi-mandatory”.
In the Netherlands and Switzerland, private pensions are mainly defined benefit, whilst in the other countries they are defined contribution. Replacement rates from mandatory private schemes range from 7% in Norway and 12% in Costa Rica and Sweden to 51% in Denmark and 52% in Iceland. In Sweden the contribution rate for the private pension increases from 4.5% below to 30% above the ceiling for the public scheme, hence the total replacement rate is higher for high earners than average earners.
Voluntary private pensions
Voluntary private pensions are shown for nine countries where voluntary private pensions have broad coverage (either assets are above 25% of GDP or coverage is above 75%). Voluntary private pensions include both voluntary occupational and voluntary personal plans. In Estonia the FDC scheme was previously mandatory, but since January 2021 it has become voluntary, with the possibility of re-joining 10 years after opting out. In addition withdrawals of funds have also been permitted, with one-quarter of funds having been withdrawn thus far (Chapter 1). In Japan, a defined benefit plan is modelled, with the others having defined contribution schemes. In addition, the housing account in Mexico and the severance account in Israel have been added as if they are not utilised during the working career, they are then transferred to the pension accounts at retirement.
When voluntary private pensions are taken into account for the whole career in Belgium, Canada, Estonia, Germany, Ireland, Israel, Japan, Lithuania, Mexico, New Zealand and the United States the average replacement, for these 11 countries, is 58% for an average earner compared with 38% when only mandatory schemes are considered. The voluntary component has the largest impact on the replacement rate, more than 30 and 40 percentage points, in Ireland and the United States, respectively.
The length of the contribution period clearly has an impact on the total replacement rate. The chart below compares the full-career full-contribution case with the full-career case but with contributions in the voluntary scheme from age 35 and 45 only, perhaps a more appropriate scenario. The schemes in Israel and Mexico are not considered as contributions are mandatory at all ages to severance and housing accounts respectively.
Among these nine countries, only contributing from age 35 (45) reduces the gross replacement rate by 7 (13) percentage points on average compared with the full-contribution case. Contributing to the voluntary scheme from age 35 generates the highest replacement rates in the United States, at 66%, above the OECD average for a full career worker.