Cross-country comparisons of public pensions often rely on replacement rates (public pension ÷ pre-retirement earnings).
Example
I’m not convinced this is the right metric if the objective of public pensions is adequacy rather than income proportionality.
Replacement rates implicitly assume that consumption scales with earnings and that preserving relative income rank is the goal. But public pensions are more naturally evaluated by whether they provide a consumption floor—i.e., whether they support a dignified standard of living. That suggests an alternative metric: absolute, PPP-adjusted pension income, rather than a ratio to prior wages.
Separately from the choice of metric, there are two methodological issues that seem under-addressed when computing pension adequacy across countries.
First, pensions are taxed.
In many European systems, public pensions are taxed largely like labor income and often face social levies. In the US, Social Security has preferential tax treatment at low and moderate incomes due to the standard deduction and partial-inclusion rules. Any adequacy comparison should be made on an after-tax basis.
Second, employee payroll taxes are often ignored.
Most comparisons use pre-tax wages but do not adjust for cross-country differences in employee pension contributions. Higher employee payroll taxes are economically equivalent to forced saving, and ignoring them conflates higher benefits with earlier wage extraction.
While OECD net replacement rates already account for income taxation, they still anchor outcomes to pre-retirement earnings and do not account for differences in employee payroll contributions as foregone disposable income or saving.
Question:
If the goal is to compare pension adequacy rather than income replacement, what metric—and what adjustments—would be most appropriate? And how does the USA compare with other developed nations in that metric.
Are replacement rates the right metric for comparing public pensions?
byu/italophile inAskEconomics
Posted by italophile