4 February, 2025
The prevalence of employer contributions over those of the worker is another common denominator in the models of the Netherlands, Iceland, Denmark, Israel and Australia. Spending on the solidarity or non-contributory pillar in these countries ranges between 2.9% and 8.1% of GDP.
The Netherlands, Denmark, Iceland, Israel and Australia are, in that order, the countries that today have the best and most sustainable pension systems in the world, according to the 2023 ranking published annually by the consulting firm Mercer.
To define the location in this list, aspects such as the sustainability of the system, the level of coverage in the total population, pension amounts, operating expenses, governance and communication with beneficiaries are considered and weighted.
Each of these countries has particularities, but in all of them there are three constants: the presence of individual capitalization, the existence of a solidarity or non-contributory pillar and the greater contribution that employers make over employees in monthly contributions.
In Chile, the pension system is experiencing a moment of uncertainty. President Gabriel Boric proposed a profound reform of the sector as one of his programmatic axes. After a year of processing, the respective bill remains paused in the Chamber of Deputies.
So far, the debate mainly focuses on two aspects. The first is what percentage of the expected increase of six percentage points will go to individual capitalization and what percentage will go to PAYGO (or intergenerational solidarity). The second is the disintegration of the industry, since the ruling party promotes that the Pension Fund Administrators (AFPs) only manage the funds, but abandon the other complementary tasks of the business, such as the collection and payment of pensions.
Below we present a zoom into the way in which the reference countries work in pension matters in the world, highlighting their way of saving, the contribution rate, the contribution of workers versus employers and the legal retirement age. The replacement rate is also included, understood here as the percentage that the pension is equivalent to with respect to the worker’s average salary during his or her active life (others calculate it with respect to recent salaries). A 50% replacement rate means that the pension is half the average amount the worker earned monthly during his/her working life.
The Netherlands has 17 million inhabitants, tulip fields, famous museums and Europe’s main port (Rotterdam). But in economic matters, one of its most powerful indicators is its employment rate, which reaches 78%, 12 percentage points higher than the average of the Organisation for Economic Cooperation and Development (OECD). Furthermore, their average annual salary reaches US$58,828, which exceeds the average of the developed States grouped in this entity, which is US$49,165.
The Dutch occupy first place in the world pension ranking. Since 2020, the pension system of this European country has considered a collective defined contribution: employees’ assets are invested jointly and the returns are divided among all those who make up the funds. Although the percentage of contribution rates depends on the pension plan, in general terms it reaches 25.7%: the worker contributes 18 percentage points and the employer 7.7 points.
Additionally, there is an important solidarity pillar, whose spending represents 5% of GDP, according to the latest OECD figures. And there is also the voluntary pillar.
The legal retirement age is 67 years, without distinction of sex. Starting in 2028 it will be 67 years and three months, and it is expected that as life expectancy increases, so will this minimum pension age.
Its net replacement rate is 89.2%, according to OECD data. What does that mean? That as a pension, almost 90% of the amount of the average salary that the worker had during his/her active life is received, in a country where labor income is high.
This island country is in second place in the 2023 global pension ranking. It stands out in the so-called ‘adequacy’, which is the amount of money that retirees will receive when they begin their inactive work stage.
The method used by Iceland to resolve this dimension of social security is like Chile and includes a basic state pension and a state supplement. In total, Iceland spends 2.9% of GDP on this concept, according to OECD figures. However, both benefits are subject to controls that study employees’ income.
In parallel, the country has contribution plans in private entities that are mandatory. In them, the main part of the contribution is paid by the employer (15.35 percentage points of the salary), while employees contribute another 4 points.
As in Chile, there is also a voluntary pension savings system, where people can contribute according to their conditions and in different entities, such as banks, financial institutions or pension administrators.
As in the Netherlands, the minimum retirement age in Iceland – with a population of 387,000 – is 67 years. The system is based on a defined contribution, with a net replacement rate that reaches 59.7%, according to OECD data.
The country has a retirement income system that includes a basic public pension plan and a supplementary benefit depending on the person’s income. Both tax benefits require spending equivalent to 8.1% of GDP. In parallel, there is a personal contribution plan for workers that reaches 12% of their salary. Of this figure, 8 points are charged to the employer and 4 are contributed by the worker.
Denmark has a legal retirement age of 67, although its effective age is greater than 70. Its replacement rate is one of the highest in the world, reaching 84%, according to OECD data.
Israel has the fourth best pension system in the world, according to the Mercer ranking. The country only integrated mandatory individual capitalization in 2008, so today it has a mixed pension system, which includes a universal state pension—which represents a fiscal expense equivalent to 4.6% of GDP—and private pensions with mandatory contributions from employees and employers.
Workers contribute 18.5% of their monthly remuneration, of which 6 points are contributed by the employee and 12.5 points by the employer.
Additionally, workers have an extra contribution of 6%, paid by the employer, to cover contributions in case of unemployment. If the worker does not use them, that amount is accumulated in his pension individual account.
The legal retirement age is 67 years for men. For women it differs depending on their year of birth, according to the latest reform of 2021, and can vary between 62 years (for older women) and 65 years (for currently younger women).
The net replacement rate is 51.2% for men and 42.1% for women, OECD statistics say.
The Australians surpassed the Finns in 2023 and became the fifth best pension system in the world. Although with some differences, Australia contemplates a mixed model like Chile: a contributory pillar, a solidarity pillar and a voluntary pillar.
In individual capitalization—superannuation—last year, Australian legislation implemented a progressive increase in the mandatory contribution for workers until 2025. Through this public policy, the aim is to go from a contribution rate of 9% to 12% (currently it is 11%).
The entire private contribution is borne by the employer. And the worker is left with the option of increasing their future savings with voluntary plans, although companies can also contribute even more through tax incentives.
One of the constituent aspects of Australia’s pension system is the great number of funds, which total close to 600 thousand. This implies that each worker can choose in which specific sector of the economy wants to invest to increase his/her resources and move between them according to market returns.
Additionally, the State operates through a universal basic pension (called “age pension”), which is delivered to those workers with low retirement income. Fiscal spending on these pensions reaches 4.3% of GDP, according to the OECD.
Like most pension-leading countries, Australians have their legal retirement age at 67. And their net replacement rates are similar to the Chilean ones without considering the Universal Guaranteed Pension (PGU): 40.5% for men and 36.8% for women, according to figures from the OECD pension area.
The Chilean reality
Chile is ranked 14th in the global pension ranking. It is the leader in Latin America (Uruguay is second).
The Chilean model is mixed. The basis is individual capitalization, where workers contribute 10% of their monthly taxable salary to a private administrator (AFP). That payment is entirely done by the worker. According to figures from the Pension Superintendency as of September of this year, the mandatory savings system managed US$170 billion.
Additionally, the solidarity pillar is deployed in a Universal Guaranteed Pension (PGU) that is paid to men and women from the age of 65 and reaches 90% of the population with the lowest income, which allows broad segments of the middle class to be included. The fiscal cost of the PGU was around US$5 billion in 2022, equivalent to 1.7% of GDP. For this year it should reach 2% of GDP.
In the third place there is a voluntary savings program, in which the AFPs, insurance companies, different fund managers (mutual, investment, housing, general funds) and banks participate as providers. They manage savings about US$ 11 billion in assets under management.
The legal retirement age is 65 for men and 60 for women. The replacement rate reported by the OECD is 38.5% for men and 35.4% for women. However, with the implementation of the PGU, the replacement rate rose sharply for the poorest segments, who usually have a lower contribution density during their working lives. Current estimates from private institutions indicate that the average replacement rate exceeds 90% when considering the contributions of the PGU.
Source: El Mercurio
Date: 13.11.2023
4 February, 2025
31 January, 2025
18 December, 2024