Pension promises

OECD Observer

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Can governments afford the pensions promised to future retirees? After all, higher life expectancy means pensions have to be paid for a longer time. The OECD’s new comprehensive “pension wealth indicator” works out the lump-sum equivalent of all the pension income a worker can expect to receive, taking into account pension level, retirement age and life expectancy in the respective country.

By this count, Luxembourg has the highest pension wealth. It amounts to 18 times those yearly earnings for men on average wages, and nearly 22 times for women, reflecting their longer life expectancy. This means that if the government had to pay upfront now, the lump sum would come to an average of $587,000 for each pensioner on retirement. Pension wealth for Luxembourg is nearly treble the average for OECD countries, which is nonetheless over $200,000 per employee. In Ireland, New Zealand, the UK and the US, where pension levels are modest in relation to economy-wide average incomes (see percentages in the graph), pension wealth is less than six times average earnings.

Pension promises would obviously be more affordable if eligibility ages were higher. The official pension eligibility age in most OECD countries is 65, though it is less than that in the Czech Republic, France, Hungary, Korea, the Slovak Republic and Turkey. For a full list of pension wealth indicators and levels, see Pensions at a Glance, forthcoming.

©OECD Observer No 249, May 2005

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