Net pension replacement rates: Mandatory and Voluntary schemes

Abstract

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.