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Indicator A5. What are the financial incentives to invest in education?
Adults who complete tertiary education benefit from positive financial returns over their working-age life because they are more likely to be employed and to earn more than those without this degree.
Investing in tertiary education also pays off in the long run for the public sector, since tertiary-educated adults pay higher income taxes and social contributions.
On average across the OECD, a man or a woman can expect to receive around USD 7 for each USD they invested in tertiary education, but women tend to have lower foregone earnings (therefore lower total costs) and lower total benefits than men.
Context
Investing time and money in education is an investment in human capital. Better chances of employment (see Indicator A3) and higher earnings (see Indicator A4) are strong incentives for adults to invest in education and postpone employment. Although women currently have higher levels of education than men on average (see Indicator A1), men enjoy better employment and earning outcomes from education, on average.
Countries benefit from having more highly educated individuals through higher revenues from the taxes and social contributions paid by those individuals once they enter the labour market. As both individuals and governments benefit from higher levels of educational attainment, it is important to consider the financial returns to education alongside other indicators, such as access to and completion of higher education (see Indicator B5).
Other factors not reflected in this indicator also affect the returns to education. Financial returns may be affected by the field of study and by the specific economic, labour-market and institutional context in each country, as well as by social and cultural factors. Furthermore, returns to education are not limited to financial returns, but also include other economic outcomes, such as increased productivity, and social outcomes, such as health or well-being (see Indicator A6).
Other findings
In most OECD countries, the main cost of education for individuals are not direct payments, such as tuition fees and living expenses, but the earnings that individuals forego while they are in education. These vary substantially by gender and across countries, depending on the length of education, overall earning levels, differences in earnings across levels of educational attainment and students’ earnings.
For governments, direct costs (such as public expenditure on educational institutions and student grants) represent the largest share of the total public costs of education (composed of these direct costs and foregone taxes on earnings). Since the direct costs are the same for men as for women, total public costs are also quite similar for men and women.
For all countries with available data, the private and public net financial returns from obtaining a bachelor’s, master’s or doctoral or equivalent degree are greater than from obtaining a short-cycle tertiary degree.
Note
This indicator provides information on the incentives to invest in further education by considering its costs and benefits, including net financial returns and internal rates of return. It examines the choice between pursuing higher levels of education and entering the labour market, focusing on two scenarios: 1) investing in upper secondary education versus entering the labour market without an upper secondary qualification; 2) investing in tertiary education versus entering the labour market with an upper secondary qualification.
It considers two types of investors: 1) individuals (referred to here as “private”) who choose to pursue higher levels of education and the additional net earnings and costs they can expect; and 2) governments (referred to here as “public”) that decide to invest in education and the additional revenue they receive (e.g. as tax revenues) and the costs involved.
This indicator estimates the financial returns on investment in education only up to a theoretical retirement age of 64 and therefore does not take pensions into account. The direct costs of education presented in this indicator do not take into account student loans. The results presented in the tables and figures of this indicator are calculated using a discount rate of 2%, based on the average real interest on government bonds across OECD countries.
Financial incentives for individuals to invest in tertiary education
Private net financial returns are the difference between the costs and benefits associated with attaining an additional level of education. In this analysis, the costs include the direct costs of attaining education and foregone earnings, while the benefits correspond to earnings from employment after paying income taxes and social contributions (see Definitions section). Another way to analyse returns to education is through the internal rate of return, which is the real interest rate that would equalise the costs and benefits, leading an investment to break even. It can be interpreted as the interest rate on the investment made on a higher level of education that an individual can expect to receive every year during their working-age life. The financial incentives to invest in education can also be expressed as total benefits relative to total costs (benefit-cost ratio). This is expressed as the financial benefit of attaining an additional level of education for each USD invested in it. Depending on which measure is used, the relative incentives to invest in additional educational attainment differ between men and women.
Adults completing a higher level of education benefit from positive financial returns over their working-age life. The gains associated with a higher level of education that individuals can expect to receive over their career exceed the cost they bear during their studies. This is true for tertiary education, but it also holds for upper secondary education. On average across OECD countries, the financial returns from tertiary education are about 1.5 times higher than the returns from upper secondary education for both men and women (Table A5.1. , Table A5.2, and Tables A5.7 and A5.8 available on line).
Investing in tertiary education pays off in the long run for both men and women. On average across the OECD, the private financial returns to tertiary education are USD 287 200 for a man and USD 226 800 for a woman. The private net financial returns to tertiary education is higher for a man than it is for a woman in most OECD countries, although younger women (25-34 year-olds) are more likely than younger men to complete tertiary education (see Indicator A1). This is partially related to the fact that the gap in earnings and employment between upper secondary and tertiary education is higher for women than it is for men. The only countries where women have higher private financial returns than men are Australia, Belgium, Estonia, Norway, Spain, Sweden and Turkey (Figure A5.1. ).
Across OECD countries, the average internal rate of return to tertiary education is 15% for men and 19% for women, below the average internal rate of return to upper secondary education (25% for men and 36% for women). The lower internal rate of return to tertiary education compared to upper secondary education is due to the higher total costs of attaining tertiary education (Table A5.1. and Table A5.2, and Tables A5.7 and A5.8, available on line).
Another way to analyse returns to education is through the benefit-cost ratio, expressed as the private financial benefit of attaining an additional level of education for each USD invested in it. Across OECD countries, the average private financial benefit for each USD invested in tertiary education is around USD 6 for a man and USD 7 for a woman, although women receive lower private net financial returns than men from tertiary education (Figure A5.2). This is due to the fact that, on average, women’s total costs and total benefits represent a similar proportion of men’s total costs and total benefits (Figure A5.3).
The total costs of attaining tertiary education vary across countries, and there are considerable gender differences. Turkey has the lowest total costs for both men and women (USD 13 200 for a man and USD 7 500 for a woman), while Switzerland has comparably high costs for both men and women (USD 85 100 and USD 86 600, respectively). This represents the highest costs for a woman across all countries with available data. The Czech Republic has the highest costs for a man (USD 109 500) (Figure A5.3). Note that these figures have been adjusted for purchasing power parity (PPP) and therefore they provide a comparable measure of the financial effort that individuals in different countries must make to finance their education, relative to their ordinary cost of living. Because figures have been PPP-adjusted, nominal exchange rates have already been accounted for. For instance, even though the currency used in Sweden is relatively stronger (in terms of nominal exchange rates) than the currency in Chile, paying for tertiary education in Chile entails a greater financial effort relative to the ordinary cost of living than it does in Sweden. In terms of PPP-adjusted total costs of investing in tertiary education, the United States is the country where individuals make the greatest financial effort to finance their education (total costs of investing In tertiary education), relative to their ordinary cost of living (Table A5.1. and Table A5.2). These differences can be understood in light of the different higher education funding policies in place in different countries, whereby states provide varying degrees of public support to higher education.
On average across OECD countries, the direct costs of tertiary education amount to USD 10 000 for both men and women, which is more than three times the direct costs of upper secondary education. The direct costs are particularly high in the United Kingdom and the United States: tuition fees and living expenses during tertiary education amount to more than USD 40 000 (USD 40 200 in the United States and 53 600 in the United Kingdom) and exceed foregone earnings, although even in these countries, the earnings advantage associated with tertiary education compensates for the costs. In most OECD countries, however, the main costs of tertiary education are still foregone earnings. The average foregone earnings for attaining tertiary education are about USD 42 900 for a man and USD 30 000 for a woman (Table A5.1. and Table A5.2).
As for total costs, the total benefits from tertiary education are also higher for a man than for a woman. On average across the OECD, they are about USD 340 100 for a tertiary-educated man and only USD 266 800 for a tertiary-educated woman. Australia, Estonia, Norway, Sweden and Turkey are the only OECD countries where women enjoy higher total benefits from tertiary education than men (Figure A5.3).
Further education yields higher gross earnings benefits over an individual’s career. Across OECD countries, the average gross earnings benefits are USD 534 600 for a tertiary-educated man and USD 389 400 for a tertiary-educated woman compared with their peers with upper secondary attainment. Countries’ tax and social benefit systems also have an impact on the benefits of attaining tertiary education. Income taxes and social contributions account for the lowest share of the benefits in Chile and Korea (less than one-fifth of the gross earnings benefits), while in Belgium and Italy (for men only) they account for more than half (Table A5.1. and Table A5.2).
Note: Future costs and benefits are discounted at a rate of 2%.
1. Only net earnings are available and the calculations use these values as if they were gross earnings.
2. Year of reference differs from 2018. Refer to the source table for more details.
Countries are ranked in ascending order of total private benefits for a man attaining tertiary education.
Source: OECD (2021), Tables A5.1 and A5.2. See Source section for more information and Annex 3 for notes (https://www.oecd.org/education/education-at-a-glance/EAG2021_Annex3_ChapterA.pdf).
Financial incentives for governments to invest in tertiary education
Higher levels of educational attainment also lead to higher returns for the public sector. On average across the OECD, the public net financial returns for attaining tertiary education is about USD 127 000 for a man and USD 60 600 for a woman. The net financial returns on investment for governments are generally closely related to the private net returns: those countries where individuals benefit the most from pursuing tertiary education are also those where governments gain the largest returns. For tertiary education, this is the case for men in Ireland and the United States, countries with very large net private and public returns for tertiary education (Figure A5.1. and Figure A5.4).
As for private financial returns, public financial returns can be also analysed through the internal rate of return, which equalises the costs and benefits related to educational investment. On average across the OECD, the internal rate of return from tertiary education to governments is 8% for a man and 6% for a woman (Table A5.4).
Public net financial returns are based on the difference between the costs and benefits associated with an individual attaining an additional level of education. In this analysis, the costs include direct public costs for supporting education and foregone taxes on earnings, while the benefits are calculated using income tax and social contributions (see Definitions section).
Across OECD countries, the average total costs of tertiary education for governments amount to USD 67 500 for a man and USD 62 000 for a woman. Direct costs (including student grants) represent the largest share of the total public cost of tertiary education, even though student loans are not taken into account in this indicator (Table A5.3 and Table A5.4). This is particularly true in countries such as Denmark, Finland and Norway, where students pay no tuition fees and have access to generous public subsidies for higher education (see Indicator C5).
Countries with high direct public costs (more than USD 80 000 and up to USD 185 000 for both men and women), such as Denmark, Luxembourg, Norway, Sweden and Switzerland, also tend to have large total public costs. In contrast, Chile has the lowest total public costs (at USD 17 000 for men and USD 16 400 for women) across all OECD countries with available data (Table A5.3 and Table A5.4).
On average in the OECD, the total public benefits are USD 194 500 for a tertiary-educated man, broken down into income tax effects (USD 140 500) and social contribution effects (USD 54 000). For a tertiary-educated woman, the total public benefits are USD 122 600, composed of income tax effects (USD 81 700) and social contribution effects (USD 40 900). Among OECD countries, Germany and Ireland have the largest total public benefits for tertiary-educated men (over USD 350 000) and Belgium has the largest public benefits for tertiary-educated women (over USD 250 000) (Table A5.4).
In relative terms, the public benefit from each USD invested in tertiary education are generally much lower than the private benefit, as the total costs are higher for governments than for individuals. On average across OECD countries, each USD that governments invest in tertiary education generates a public benefit of USD 2.9 for a man and USD 2.0 for a woman (Table A5.3 and Table A5.4).
In Estonia, Sweden and Switzerland, the total public benefits do not cover the total public costs of tertiary education for women, so the net financial returns are negative. In all countries, governments receive more benefit from each USD invested in tertiary education for a man than for a woman. The difference by gender is mainly due to the fact that the public benefits for men are greater than the public benefits for women. This suggests that governments have a role to play in improving women’s integration into the labour market (Figure A5.4, Table A5.3 and Table A5.4).
Financial incentives by level of tertiary education
The net financial returns for tertiary education are divided into two categories for analysis: short-cycle tertiary attainment and attainment of a bachelor’s, master’s and doctoral or equivalent degree. The share of the population with qualifications at each tertiary level differs across countries (see Indicator A1), and the mix of qualifications can impact the financial returns to education for tertiary education overall.
For all countries with available data, the private and public net financial returns from obtaining a bachelor’s, master’s or doctoral degree or equivalent are greater than from obtaining a short-cycle tertiary degree. Although the total costs of a bachelor’s, master’s or doctoral degree or equivalent tend to be higher, the total benefits accrued during individuals’ working lives compensate for the higher initial costs (Tables A5.5 and A5.6, available on line). Private net financial returns for tertiary education overall would therefore underestimate the value of investing in bachelor’s, master’s and doctoral degrees or equivalent, especially in countries with a relatively large share of adults whose highest level of attainment is short-cycle tertiary (see Indicator A1).
The calculation of the financial returns, or the net present value (NPV), of education corresponds to a cost-benefit analysis that converts future expected flows into a present value by using a discount rate. The discount rate takes into account the fact that money tomorrow is worth less than money today, and must therefore be “discounted” at a specific rate to find its current worth. The choice of the discount rate is challenging, and it makes a considerable difference when analysing the returns to long-term investments, as is the case with investment in education.
The results presented in the tables and figures of this indicator are calculated using a discount rate of 2%, based on the average real interest on government bonds across OECD countries. However, it can be argued that education is not a risk-free investment, and that the discount rate should therefore be higher. The OECD countries that perform similar cost-benefit analyses use discount rates higher than 2%, but the rate used varies across countries (OECD, 2018[1]).
In order to assess the size of the impact of the discount rate, it is helpful to perform a sensitivity analysis. Table A5.5 shows how the private financial returns for a man attaining upper secondary education changes when three different discount rates are used. Changing from a discount rate of 2% to a rate of 3.75% reduces the NPV by at least 29% in all countries with available data. If a discount rate of 8% is used, the NPV falls by over 50% in all countries. These comparisons highlight the sensitivity of the NPV results to changes in the discount rate.
Table A5.a. Net financial returns for a man attaining tertiary education, by discount rate (2018) |
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Compared with returns to upper secondary education, in equivalent USD converted using PPPs for GDP |
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Note: Values are based on the difference between men who attained tertiary education and those who attained upper secondary education. Values have been rounded up to the nearest hundred. Direct costs to education do not include student loans. Costs and benefits are earned over a working-age life and are transferred back to the start of the investment. |
2. Only net earnings are available and the calculations use these values as if they were gross earnings. |
3. The probability of students having earnings refers to the employment rate from the LSO TRANS questionnaire instead of the share of earners from the LSO Earnings questionnaire. |
Source: OECD (2021). See Source section for more information and Annex 3 for notes (https://www.oecd.org/education/education-at-a-glance/EAG2021_Annex3_ChapterA.pdf). Please refer to the Reader’s Guide for information concerning symbols for missing data and abbreviations. |
Adults refer to 15-64 year-olds.
The benefit-cost ratio is total benefits relative to total costs, representing the financial benefits of attaining an additional level of education for each USD invested in it.
Direct costs are the direct expenditure on education per student during the time spent in school. Direct costs of education do not include student loans.
Private direct costs are the total expenditure by households on education. They include net payments to educational institutions as well as payments for educational goods and services outside of educational institutions (school supplies, tutoring, etc.).
Public direct costs are the spending by government on a student’s education. They include direct public expenditure on educational institutions, government scholarships and other grants to students and households, and transfers and payments to other private entities for educational purposes. They do not include student loans.
Educational attainment refers to the highest level of education successfully completed by an individual.
Foregone earnings are the net earnings an individual not in education (a non-student) can expect, minus the net earnings an individual can expect to receive while studying.
Foregone taxes are the additional tax revenues the government would have received if the individual had chosen to enter the labour force as a non-student instead of pursuing further studies.
Gross earnings benefits are the discounted sum of earnings premiums over the course of a working-age life associated with a higher level of education.
The income tax effect is the discounted sum of additional levels of income tax paid by the private individual or earned by the government over the course of a working-age life associated with a higher level of education.
The internal rate of return is the (hypothetical) real interest rate equalising the costs and benefits related to the educational investment. It can be interpreted as the interest rate an individual can expect to receive every year during a working-age life on the investment made on a higher level of education.
Levels of education: See the Reader’s Guide at the beginning of this publication for a presentation of all ISCED 2011 levels.
Net financial returns are the net present value of the financial investment in education, the difference between the discounted financial benefits and the discounted financial cost of education, representing the additional value that education produces over and above the 2% real interest that is charged on these cash flows.
The effective retirement age could be slightly above the theoretical retirement age of 64 in some OECD countries (OECD, 2019[2]). Returns to education are studied from the perspective of financial investment.
Two periods are considered (Diagram A5.1):
1. time spent in education during which the private individual and the government pay the cost of education
2. time spent after leaving formal education (or “not studying”) during which the individual and the government receive the added payments associated with further education.
In calculating the returns to education, the approach taken here is the NPV of the investment. To allow direct comparisons of costs and benefits, the NPV expresses the present value for cash transfers happening at different times. In this framework, costs and benefits during a working-age life are transferred back to the start of the investment. This is done by discounting all cash flows back to the beginning of the investment with a fixed interest rate (discount rate).
To set a value for the discount rate, long-term government bonds have been used as a benchmark. The choice of discount rate is challenging, as it should reflect not only the overall time horizon of the investment, but also the cost of borrowing or the perceived risk of the investment (Box A5.1). To allow for comparability and to facilitate the interpretation of results, the same discount rate (2%) is applied across all OECD countries. All values presented in the tables in this indicator are in NPV equivalent USD using PPPs.
The source for the direct costs of education is the UOE data collection on finance (year of reference 2018 unless otherwise specified in the tables).
The data on gross earnings are based on the OECD Network on Labour Market and Social Outcomes earnings data collection, which compiles data from national Labour Force Surveys, EU Statistics on Incomes and Living Conditions, Structure of Earnings Surveys, and other national registers and surveys. Earnings are age-, gender- and attainment-level specific. For the calculation of this indicator, data on earnings have been pooled from three different years (2016-18).
Income tax data are computed using the OECD Taxing Wages model, which determines the level of taxes based on a given level of income. This model computes the level of the tax wedge on income for several household composition scenarios. For this indicator, a single worker with no children is used. For country-specific details on income tax in this model, see Taxing Wages 2021 (OECD, 2021[3]).
Employee social contributions are computed using the OECD Taxing Wages model’s scenario of a single worker aged 40 with no children. For country-specific details on employee social contributions in this model, see Taxing Wages 2021 (OECD, 2021[3]).
References
[3] OECD (2021), Taxing Wages 2021, OECD Publishing, Paris, https://doi.org/10.1787/83a87978-en.
[2] OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris, https://dx.doi.org/10.1787/b6d3dcfc-en.
[1] OECD (2018), Education at a Glance 2018: OECD Indicators, OECD Publishing, Paris, https://dx.doi.org/10.1787/eag-2018-en.
Cut-off date for the data: 17 June 2021. Any updates on data can be found on line at: https://doi.org/10.1787/eag-data-en. More breakdowns can also be found at: http://stats.oecd.org, Education at a Glance Database.
Table A5.1. Private costs and benefits for a man attaining tertiary education (2018) |
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As compared with a man attaining upper secondary education, in equivalent USD converted using PPPs for GDP; future costs and benefits are discounted at a rate of 2% |
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Note: Values are based on the difference between men who attained tertiary education and those who attained upper secondary education. Values have been rounded up to the nearest hundred. Direct costs to education do not include student loans. Costs and benefits are earned over a working-age life and are transferred back to the start of the investment. |
2. Only net earnings are available and the calculations use these values as if they were gross earnings. |
3. The probability of students having earnings refers to the employment rate from the LSO TRANS questionnaire instead of the share of earners from the LSO Earnings questionnaire. |
Source: OECD (2021). See Source section for more information and Annex 3 for notes (https://www.oecd.org/education/education-at-a-glance/EAG2021_Annex3_ChapterA.pdf). Please refer to the Reader’s Guide for information concerning symbols for missing data and abbreviations. |
Table A5.2. Private costs and benefits for a woman attaining tertiary education (2018) |
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As compared with a woman attaining upper secondary education, in equivalent USD converted using PPPs for GDP; future costs and benefits are discounted at a rate of 2% |
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Note: Values are based on the difference between women who attained tertiary education and those who attained upper secondary education. Values have been rounded up to the nearest hundred. Direct costs to education do not include student loans. Costs and benefits are earned over a working-age life and are transferred back to the start of the investment. |
2. Only net earnings are available and the calculations use these values as if they were gross earnings. |
3. The probability of students having earnings refers to the employment rate from the LSO TRANS questionnaire instead of the share of earners from the LSO Earnings questionnaire. |
Source: OECD (2021). See Source section for more information and Annex 3 for notes (https://www.oecd.org/education/education-at-a-glance/EAG2021_Annex3_ChapterA.pdf). Please refer to the Reader’s Guide for information concerning symbols for missing data and abbreviations. |
Table A5.3. Public costs and benefits for a man attaining tertiary education (2018) |
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As compared with a man attaining upper secondary education, in equivalent USD converted using PPPs for GDP; future costs and benefits are discounted at a rate of 2% |
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Note: Values are based on the difference between men who attained tertiary education and those who attained upper secondary education. Values have been rounded up to the nearest hundred. Direct costs to education do not include student loans. Costs and benefits are earned over a working-age life and are transferred back to the start of the investment. |
2. Only net earnings are available and the calculations use these values as if they were gross earnings. |
3. The probability of students having earnings refers to the employment rate from the LSO TRANS questionnaire instead of the share of earners from the LSO Earnings questionnaire. |
Source: OECD (2021). See Source section for more information and Annex 3 for notes (https://www.oecd.org/education/education-at-a-glance/EAG2021_Annex3_ChapterA.pdf). Please refer to the Reader’s Guide for information concerning symbols for missing data and abbreviations. |
Table A5.4. Public costs and benefits for a woman attaining tertiary education (2018) |
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As compared with a woman attaining upper secondary education, in equivalent USD converted using PPPs for GDP; future costs and benefits are discounted at a rate of 2% |
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Note: Values are based on the difference between women who attained tertiary education and those who attained upper secondary education. Values have been rounded up to the nearest hundred. Direct costs to education do not include student loans. Costs and benefits are earned over a working-age life and are transferred back to the start of the investment. |
2. Only net earnings are available and the calculations use these values as if they were gross earnings. |
3. The probability of students having earnings refers to the employment rate from the LSO TRANS questionnaire instead of the share of earners from the LSO Earnings questionnaire. |
Source: OECD (2021). See Source section for more information and Annex 3 for notes (https://www.oecd.org/education/education-at-a-glance/EAG2021_Annex3_ChapterA.pdf). Please refer to the Reader’s Guide for information concerning symbols for missing data and abbreviations. |