Public Pensions

From the time Bismarck invented the modern welfare state in Germany, public pensions have become a cornerstone of public policy in virtually every advanced economy. But as populations everywhere age, it is becoming more and more costly to run generous public retirement systems. Which of the following OECD countries promises the average worker the most generous public pension benefits?

A. United Kingdom
B. Switzerland
C. Spain
D. Turkey

A. United Kingdom is not correct.

The United Kingdom has one of the least generous public pension systems in the OECD. Someone with average earnings can expect to receive benefits equal to only about 40% of his or her pay upon retiring. The OECD average pension is equal to 70% of average lifetime earnings.

Only Mexico, Ireland, Japan and New Zealand have systems that are comparably ungenerous to the average worker. These countries require employees to focus much more on private savings for a secure retirement.

B. Switzerland is not correct.

While one of the richest countries in the world, Switzerland has public pensions substantially more generous than the United Kingdom's, but they are still below the OECD average. Swiss retirees who earned average wages receive 64% of their earnings as retirement benefits.

Other countries with moderate support of average-wage workers (giving them pensions in the rage of 57%-64% of previous earnings) are Canada, Germany, France, Sweden and the Czech Republic. In the United States, Social Security pensions are somewhat less generous, at 52%.

C. Spain is not correct.

Regardless of income, workers in Spain receive pensions equal to about 85% of their average earnings.

In contrast, some countries have a progressive pension system, meaning that they provide significantly higher pension levels to low-wage workers in order to protect them from poverty in old age. These include Denmark, Korea, the Czech Republic and Canada.

D. Turkey is correct.

Turkey is one of several OECD members that provide pensions so generous that retirees receive more income than they earned as workers. A worker with average earnings receives 104% of his wages in pension benefits. Likewise, in Greece, the figure is 110% and in Hungary, 102%. The Netherlands comes close, with pensions replacing 95% or more of earnings at all earnings levels.

These pension systems are bound to become an enormous burden on the national economy as the population ages, both because benefits are so costly — and because they make early departure from the labor force so attractive.

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