Pensions at a Glance 2025

Sensitivity of replacement rates to changes in the economic assumptions

Key results

The base case in Chapter 4 concentrates on showing full-career replacement rates under the standard economic parameters that apply within the report, with some changes from those used in previous editions. This indicator focusses on a different set of economic assumptions – one that may better reflect the possibility of an extended period of low growth and low interest rates (alternative scenario). For workers with average earnings and a full career from age 22, the future gross replacement rate at the normal retirement age averages 54.3 for men and 53.6% for women in the 38 OECD countries under the alternative scenario, which is around 2 p.p. higher than the base case figures.

Full career male workers at the average wage throughout their career will have on average, a gross replacement rate of 52.0%, when they start working at age 22. These estimates are based on the standard economic parameters described in Chapter 4. As an alternative these standard parameters have been lowered to account for the possibility of a low economic growth and low interest rates scenario over the long term, which might be partly related to population ageing (Table 5.3).

Table 5.3. Annual economic assumptions

Economic assumptions that apply every year from 2024

	Base case assumptions	Alternative scenario
Real discount rate	1.5%	1.0%
Price inflation	2.0%	1.0%
Real wage growth	1.25%	0.75%
Real rate of return	2.5%	2.0%
GDP growth	Country specific based on projections of working-age population	Adjusted downward by 0.50%

The gross replacement rate for male workers at average earnings increases slightly from 52.0% to 54.3 under the alternative scenario. Similarly, the level for women increases from 51.4% to 53.6%.

There are four OECD countries, Germany, Ireland, Japan and New Zealand that have the same replacement rate under both the alternative scenario and the base case. In all these countries there is either just a basic pension linked to earnings growth, or the relevant parameters of the pension system are unaffected by discount rate or the rate of return, resulting in a steady state replacement rate if the earnings are at a constant proportion of the average. Although the replacement rates are the same in both cases for Japan, this will not hold for all economic conditions.

The largest increase in replacement rate is found in Mexico at 16.5 p.p. Belgium, Portugal, Spain, Türkiye and the United Kingdom are next with increases of between 5.8 p.p. and 7.6 p.p. In these countries past earnings are valorised to prices (Belgium, Portugal and Spain) or partially to GDP (Türkiye), or the basic pension and the new 100% replacement rate threshold are indexed to prices (Mexico), generating higher pension value relative to future wages as a result of lower real-earnings growth. In the United Kingdom the triple lock commitment of a minimum of 2.5% increase in the basic pension comes into effect, significantly increasing the value of the pension relative to average earnings and counteracting a drop of 2.3 p.p. in the FDC.

Conversely, the replacement rate falls by 2 p.p. in the Netherlands and by 1 p.p. in Latvia. In FDC schemes, the lower real rates of return by 50 basis points in the alternative scenario is offset by lower real-wage growth in the accumulation phase, but the lower real discount rate raises the price of price‑indexed annuities, lowering replacement rates.

For the G20 countries only South Africa, due to having a flat rate basic pension, has the same replacement rate under the base case and the alternative scenario. Brazil has the largest increase at 9.4 p.p. All the other countries have an increase except for India where there is a small decrease of 0.3 p.p.

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.

Often, the replacement rate is expressed as the ratio of the pension to final earnings (just before retirement). 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.

Further reading

OECD (2021), Pensions at a Glance 2021: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/ca401ebd-en.

Table 5.4. Gross pension replacement rates by different economic assumptions

Percentage of average earnings

Full career male workers at average earnings (women where different)
	Pension age		Base case		Alternative scenario		Difference (p.p.)
Australia	67		40.8	(38.5)	44.7	(42.4)	3.9	3.9
Austria	65		74.1		75.2		1.1
Belgium	67		43.5		49.3		5.8
Canada	65		37.1		38.1		1.0
Chile	65		49.7	(49.6)	48.5	(48.4)	‑1.2
Colombia	62	(57)	74.8		76.8		2.0
Costa Rica	65	(63)	65.7	(62.2)	67.4	(63.9)	1.7	1.7
Czechia	67		44.2		45.4		1.2
Denmark	74		72.7		73.3		0.5
Estonia	71		29.3		30.8		1.5
Finland	68		57.8		58.6		0.8
France	65		56.6		60.8		4.2
Germany*	67		42.1		42.1		0.0
Greece	66		79.6		82.2		2.6
Hungary	65	(62)	51.9	(48.4)	54.3	(50.6)	2.4	2.2
Iceland	67		43.9		49.1		5.2
Ireland*	66		24.3		24.3		0.0
Israel	67	(65)	42.8	(36.5)	44.6	(38.1)	1.8	1.6
Italy	70		70.6		70.6		‑0.1
Japan*	65		36.5		36.5		0.0
Korea	65		33.4		36.1		2.8
Latvia	65		38.7		38.1		‑0.7
Lithuania	65		17.4		14.9		‑2.8
Luxembourg	62		75.6		77.1		1.5
Mexico	65		69.6		86.1		16.5
Netherlands	70		74.7		73.0		‑1.7
New Zealand*	65		39.5		39.5		0.0
Norway	67		46.1		45.8		‑0.3
Poland	65	(60)	28.6	(22.4)	28.7	(22.5)	0.1	0.1
Portugal	68		72.4		79.1		6.7
Slovak Republic	69		58.0		59.3		1.3
Slovenia	62		45.9		46.1		0.2
Spain	65		80.4		88.0		7.6
Sweden	70		63.7		64.0		0.3
Switzerland	65		42.4		46.6		4.2
Türkiye	65	(63)	69.1	(66.4)	75.1	(72.0)	6.1	5.6
United Kingdom	68		44.7		51.3		6.6
United States	67		39.7		41.2		1.6
OECD	66.4	(65.9)	52.0	(51.4)	54.3	(53.6)	2.2	2.2
Argentina	65	(60)	68.7	(66.3)	75.4	(73.0)	6.8	6.7
Brazil	65	(62)	88.4	(93.3)	97.8	(102.6)	9.4	9.3
China	63	(58)	80.6	(61.9)	82.2	(63.2)	1.6	1.3
India	58		39.2	(38.1)	39.3	(37.8)	0.1	‑0.3
Indonesia	65		53.4	(50.7)	56.2	(53.4)	2.8	2.7
Saudi Arabia	62		70.2		78.5		8.3
South Africa*	60		7.8		7.8		0.0

Note: * Individuals have the same gross benefit under both the base case and alternative economic assumption scenarios.

Source: OECD pension models.

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