Pensions at a Glance 2025

Methodology and assumptions

Introduction

The indicators of pension entitlements that follow here in Chapter 4 use the OECD cohort-based pension models. The methodology and assumptions are common to the analysis of all countries, allowing the design of pension systems to be compared directly. This enables the comparison of future entitlements under today’s parameters and rules.

The pension entitlements that are presented are those that are currently legislated in OECD countries. Reforms that have been legislated before publication are included where sufficient information is available. Changes that have already been legislated and are being phased in gradually are modelled from the year that they are implemented and onwards.

The values of all pension system parameters reflect the situation in 2024 onwards. The calculations in this chapter show the pension benefits of a single worker who enters the system that year at age 22 – that worker is thus born in 2002 – and retires after a full career at the same relative wage. Chapter 5 deals with pensions for couples, career break cases due to childcare or unemployment, examines the sensitivity of results to changing economic assumptions or different wage profiles, and compares futures pensions of self-employed workers to the full-career employee. The baseline results are shown for single individuals. All indexation and valorisation rules follow what is legislated.

Career length

A full career is defined here as entering the labour market at age of 22 and working until the normal pension age (see indicator on “Future retirement ages”). The implication is that the modelled length of the career is country-specific and varies with the normal retirement age: 40 years for retirement at 62, 45 for retirement at 67, etc.

Coverage

The pension models presented here include all mandatory pension schemes for private‑sector workers, regardless of whether the schemes are public (i.e. they involve payments from government or from social security institutions, as defined in the System of National Accounts) or private. For each country, the main national scheme for private‑sector employees is modelled. Special schemes for civil servants, public-sector workers and special professional groups are excluded.

Schemes with near-universal coverage are also included, if they cover at least 85% of employees. Such plans are called “quasi-mandatory” in this report and are included for Denmark, Iceland, the Netherlands, Sweden and the United Kingdom.

Some OECD countries have broad coverage of voluntary, occupational pensions. These schemes can thus play an important role in providing retirement incomes. For these countries, a second set of results for replacement rates is shown with entitlements from these voluntary pension plans.

Resource‑tested benefits for which retired people may be eligible are also modelled. These can be means-tested, where both assets and income are considered, purely income‑tested or withdrawn only against pension income. The only asset or income included in the model is from the earnings-related pension whether that be mandatory or, where applicable, voluntary.

Pension entitlements are compared for workers with a range of different earnings levels from 0.5 times the average worker earnings (AW).

Economic variables

The comparisons are based on a single set of economic assumptions for all the OECD countries and other major economies analysed. In practice, the level of pensions will be affected by economic growth, rates of return on financial assets, price inflation, real-wage growth and discount rates, and these will vary across countries. However, by using common economic assumptions across all countries, the results indicate the differences in pension design rather than the economic performance of a particular country. In this way, differences across countries in pension levels reflect differences in pension systems and policies alone. The baseline assumptions are set out below.

Price inflation is assumed to be 2% per year. Real earnings are assumed to grow by 1.25% per year on average (given the assumption for price inflation, this implies nominal wage growth of 3.275%). Individual earnings are assumed to grow in line with the economy-wide average. This means that the individual is assumed to remain at the same point in the earnings distribution, earning the same percentage of average earnings in every year of the working life. The real discount rate (for actuarial calculations) is assumed to be 1.5% per year. The net real rate of return on funded, defined contribution pensions over the long term is assumed to be 2.5% per year. Administrative charges, fee structures and the cost of buying an annuity are assumed to result in a defined contribution conversion factor of 90% applied to the accumulated defined contribution wealth when calculating the annuity.

The baseline modelling uses country-specific projections of mortality rates from the United Nations population database for every year from 2024 to 2100. The mortality tables used include projected changes in mortality rates after the retirement age (cohort-based mortality projections).

The calculations assume that benefits from defined contribution plans are paid in the form of a price‑indexed life annuity, which is calculated by applying the conversion factor to the actuarially fair price assuming perfect foresight. This is calculated from the mortality projections. For notional account schemes the annuity factor is based on country own mortality estimates rather than the UN projections. The pension wealth for all pension components is based on UN data.

Average earnings

The “average worker” earnings series (AW), defined as the average full-time adult gross wage earnings is presented in the OECD report Taxing Wages. The full definition and industries covered for each country can be found within that publication. In summary, the standard assumption for calculating average wage earnings is based on Sectors B-N of the International Standard Industrial Classification of All Economic Activities (ISIC Revision 4, United Nations). The calculations are based on the earnings of a full-time adult worker (including both manual and non-manual). They relate to the average earnings of all workers in the industry sectors covered. No account is taken of variation between males and females or due to age or region. The earnings calculation includes all cash remuneration paid to workers in the industries covered taking into account average amounts of overtime, cash supplements (e.g. Christmas bonuses, thirteenth month) and vacation payments typically paid to workers in the covered industry sectors.

However, not all countries are able to include overtime pay, vacation payments and cash bonuses according to the definition. It is not possible for all countries to exclude part time workers. As a result, average wage estimates used here can differ from national estimates, sometimes quite substantially.

The earnings figures used within the modelling can be found in the indicator “Average Wage” in Chapter 7.

Taxes and social security contributions

Information on personal income tax and social security contributions paid by pensioners, which were used to calculate pension entitlements, are in the “Country Profiles” available at http://oe.cd/pag.

The modelling assumes that tax systems and social-security contributions remain unchanged in the future. This constant policy assumption implicitly means that “value” parameters, such as tax allowances or contribution ceilings, are adjusted annually in line with average worker earnings, while “rate” parameters, such as the personal income tax schedule and social security contribution rates, remain unchanged.

General provisions and the tax treatment of workers for 2024 can be found in the OECD’s Taxing Wages report. The conventions used in that report, such as which payments are considered taxes, are followed here.