State pensions in the UK are among the worst in the developed world, with only Mexico offering less for full-career workers upon retirement, the Organisation for Economic Co-operation and Development said today
In its annual report on pensions, the OECD said future pension entitlement would generally be lower across its member nations and workers who do not have full contribution careers would struggle to achieve adequate retirement incomes.
The think-tank added that workers who took home average earnings of £36,000 could expect a pension from the state worth 32.6% of their final salary, compared to the OECD average of 54.4%. Lower earners fared slightly better with a replacement rate of 55.8%, compared to the OECD average of 71%, while higher earners could expect 22.5% compared to an OECD average of 48.4%.
'With the legislated increases in retirement age to 67 for both men and women, expenditure is only expected to increase by 0.5% over the next 40 years to 8.2% of GDP, well below the OECD average of 11.7%,' said the OECD.
'This low level of expenditure reflects the structure of the system which has a low public element in comparison with other OECD countries supplemented by a well-established voluntary private pension component.'
The OECD assumes that if workers contribute 8% of their earnings to a private pension scheme under auto-enrolment then the replacement rate would increase to the OECD average across all earnings levels.
Poverty rates of those aged over 65 in the UK fell from 12.2% to 8.6% between 2007 and 2010, the OECD said, adding: 'It is still important to ensure that future incomes will be adequate. Recent proposals for a flat-rate single tier pension would increase the base payment for a full career worker but overall the replacement rate from the public pension will decline.
'Using the white paper assumption of £144 per week, the future replacement rate for average earners would be 21%. As it is a flat-rate benefit, the replacement rate for low earners would be 42% and for high earners 14%.'
The think-tank also noted that retirement income could come from different sources, in particular housing and financial wealth, which is sometimes used to supplement public pension benefits.
'But they do not appear to be sources of income that can be expected to replace proper pension income,' the OECD said.
It added that better internationally comparable data was needed to explore in greater detail how housing and financial wealth could contribute to the adequacy of retirement incomes.