Gross pension replacement rates
The future gross replacement rate represents the level of pension benefits in retirement from mandatory public and private pension schemes relative to earnings when working. For workers with average earnings and a full career from age 22, the future gross replacement rate at the normal retirement age averages 52.9% for men and 47.3% for women in the Asian economies, with substantial cross-country variation. At the bottom of the range, future gross replacement rates from mandatory schemes are below 40% at the average wage in Hong Kong (China) and Sri Lanka. China and the Philippines offer replacement rates at 70% or more.
All of the replacement rates are calculated for full-career workers from the age of 22, which means that career lengths differ between countries. Hong Kong (China), Indonesia, the Philippines and Singapore have an estimated long-term retirement age of 65 years for those starting in 2020, whilst in Malaysia, Sri Lanka and Thailand it will be 55 for men, while it will be 50 for women in Sri Lanka (Table 2.1).
Full career male workers will have a replacement rate of 52.9% on average across Asian economies, with a high of 70% or more in China and the Philippines and a low of under 40% in Hong Kong (China) and Sri Lanka. The average for women is slightly lower, at 47.3%. For OECD countries, the average is 51.8% for men and 50.9% for women, at average earnings. All six OECD Asia/Pacific countries have replacement rates below 40%, whilst they are all above 40% for the other OECD countries, with a high of 74.6% in Italy.
Most OECD countries aim to protect low-income workers (here defined as workers earning half of average worker earnings) from old-age poverty, which results in higher replacement rates for them than for average earners. Low-income workers would receive gross replacement rates averaging 64.5%. Some countries, such as Australia, pay relatively small benefits to average earners, but are closer to or even above average for low-income workers.
In Asian economies 5 of the 11 countries have the same replacement rate for low and average earners. With the exception of Pakistan, where the replacement rate is double, low earners in the other Asian economies have a replacement rate for low earners only slightly above that for the average earner.
At the top of the range, based on current legislation, low earners in China will receive a future gross replacement rate of 90.6% after a full career; retirement benefits are thus just below their earnings when working. At the other end of the scale, Sri Lanka offers a gross replacement rate of 37.4% to low-income earners, thus implying a gross retirement income around 19% of average earnings after a full career. On average, the gross replacement rate at twice average earnings (here called “high earnings”) is 42.5%. Replacement rates for these high earners equals 62% in China, and above 50% in India, Indonesia and Viet Nam, while at the other end of the spectrum, Pakistan and Thailand offer a replacement rate lower than 25%.
Gross pension replacement rates differ for women in nine economies, due to a lower future pension eligibility age than for men (China, Pakistan, Sri Lanka and Viet Nam) and the use of sex specific mortality rates to compute annuities (Hong Kong (China), India, Indonesia, Malaysia and Singapore). The replacement rates are expressed as percentage of earnings which are not gender specific. Differences between the sexes are substantial in China, Malaysia, Pakistan and Sri Lanka, with replacement rates (i.e. monthly benefits) for women being between 13% and 34% lower than for men.
Definition and measurement
The old-age pension replacement rate measures how effectively a pension system provides a retirement income to replace earnings, the main source of income before retirement. The gross replacement rate is defined as gross pension entitlement divided by gross pre-retirement earnings. Under the baseline assumptions, workers earn the same percentage of average worker earnings throughout their career. Therefore, final earnings are equal to lifetime average earnings revalued in line with economy-wide earnings growth. Replacement rates expressed as a percentage of final earnings are thus identical to those expressed as a percentage of lifetime earnings.
Source: OECD pension models.
Source: OECD pension models.