Net replacement rates
Net replacement rates show greater diversity than the gross replacement rates. They range from 39.3% in Thailand to 99.3% in India. These are the extremes for average earners but findings are also given at 50% and 200% of average earnings. Replacement rates generally decline as earnings increase, though Malaysia, Viet Nam and Italy do not follow this premise, and are usually higher for men than for women. Results for China and India are the highest especially for low and average earners. As with gross replacement rates Thailand is at the bottom of the rankings.
The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking account of personal income taxes and social security contributions paid by workers and pensioners. The personal tax system plays an important role in old-age support. Pensioners often do not pay social security contributions and, as personal income taxes are progressive and pension entitlements are usually lower than earnings before retirement, the average tax rate on pension income is typically less than the tax rate on earned income. In addition, most income tax systems give preferential treatment either to pension incomes or to pensioners, by giving additional allowances or credits to older people. Therefore, net replacement rates are usually higher than gross replacement rates.
For average earners, the net replacement rate across OECD countries is 63.1% for men and 62.5% for women, which is 10% higher than for gross replacement rates. Seven of the non-OECD economies are higher than this average for men, whereas out of the OECD countries listed, only France and Italy have values higher than the average. Replacement rates within Asia are similar across the different geographical regions and also between OECD and non-OECD economies.
Low earners – workers earning only half the mean – have higher replacement rates than average earners: on average, 73.9% for the OECD. This reflects the fact that most countries attempt to protect low income workers from old-age poverty. The cross-economy variation of replacement rates at this earnings level is much lower within the OECD than for the Asian economies. The highest net replacement rate for low earners is found in China at 104.4%, which means that full-career workers with permanently low earnings have more money when they retire than when they were working. Australia and India also have replacement rates at this earnings level that are just below full replacement, at 95.0% and 99.3% respectively. The lowest rates are observed in Thailand where full-career workers on half average earnings have only a 40.3% replacement rate. The replacement rates in Indonesia, Malaysia, Singapore and Thailand are lower at this earnings level when compared to average earners.
For high earners – workers earning twice the mean – the OECD average drops to 55.0%, with all OECD countries having lower replacement rates at this earnings level than at average or 50% average earnings. For Asia the same trend applies with the exception of Malaysia, and in fact the replacement rate in Malaysia at this earnings level is the second highest for all the East Asia/Pacific economies, just behind India. The lowest replacement rate is again found in Thailand. The gap to the other economies has widened compared to other earnings levels, with India, Malaysia, the Philippines and Viet Nam all having a rate over four times that of Thailand. On comparison with the 50% average earnings figure, the replacement rate for Pakistan is just over half at 45.4% and that for New Zealand and the United Kingdom are less than one-third of their earlier levels.
For women the net replacement rates are at best equal to those for men, but are generally lower, and this is the case for all the economies listed. The rates in the Philippines, Thailand and Viet Nam are identical to those of men, whereas in China and Sri Lanka the replacement rates for women are around 85% those for men across all the earnings levels. This lower level is mainly due to the lower retirement age for women than men, meaning fewer years of contribution.
Source: OECD pension models.