Mandatory pension contributions
Total mandatory effective pension contribution rates for an average earner averaged 18.2% in 2022 among OECD countries. The highest levels are found in Italy at 33.0%, Czechia (28.0%), France (27.8%) and Greece (26.0%) with the lowest in Canada, Korea, Lithuania and Mexico all under 10%, on top of New Zealand which does not have any mandatory contributory scheme.
Most of the measures presented in Pensions at a Glance look at the benefits side of the pension system. The indicators here look at the contribution side, mapping out how much workers contributed towards their pension in 2022. Tax-financed pension benefits are not covered here. Since different pension components in a country can be financed through different income sources, mapping out the pension’s contribution terrain is very important, but it can also be difficult.
Table 8.1 presents the 37 OECD countries where pension contributions are mandatory, either public or private, and New Zealand where there is no mandatory contributory scheme. There are 12 countries – Austria, Canada, Czechia, Denmark, Finland, Germany, Iceland, Italy, Lithuania, Luxembourg, Slovenia and Türkiye – where contributions also finance disability or invalidity benefits. In addition, there are three countries, Ireland, Spain and the United Kingdom, where it is difficult to separate the pension contributions from the other parts of social insurance such as disability benefits, sickness, unemployment, etc.; these three countries are not included in the average. Overall, the average effective contribution rate equalled 18.2% at the average-wage level in 2022. The highest total mandatory contribution rates are found in Italy at 33.0%. Czechia, France and Greece also have high effective contribution rates, around 26-28%.
By contrast the mandatory contribution rate in Mexico amounts to only 6.275% but will increase to 15% over the next few years. In Canada, Korea and Lithuania, the contribution rate is also 9% or lower. However, in Canada, a large component of public pensions comes from tax-financed first-tier components (Chapter 4), reducing the role of the earnings-related pension within the country’s retirement system. In addition, there is a contribution ceiling which is equivalent to 79% of average earnings thereby reducing the contribution rate from an actual 11.4% on eligible earnings to an effective rate of 9.1% for an average earner.
The average effective contribution rate to the public schemes is 15.5% compared to 2.7% for private schemes, for the OECD35 at the average wage, which makes a total of 18.2%. Within the public scheme employee contributions are over two-thirds of those of employers, representing effective contribution rates of 6.3% and 9.1%, respectively. In Slovenia, the split is almost reverse, as employees pay 15.5% compared to 8.85% for employers. In Australia and Estonia, all mandatory contributions are paid by employers, while in Lithuania employees pay total contributions.
Countries with higher pension contribution rates often have above average pension benefits (as in the case of France and Italy). The choice of the contribution level should be the result of trading off lower net wages against higher future pensions. However, in addition higher mandatory contribution rates might hurt the competitiveness of the economy, and lower total employment while potentially increasing informality.
Further reading
OECD (2023), Taxing Wages 2023: Indexation of Labour Taxation and Benefits in OECD Countries, OECD Publishing, Paris, https://doi.org/10.1787/8c99fa4d-en.