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Luxembourg the place to retire

A huge variety of state pension systems around the world means it is much more comfortable to retire in Luxembourg than in Ireland.
/ Source: Financial Times

The average employee in an advanced country can expect a government pension of 70 percent of his or her after-tax earnings at retirement.

But a huge variety of state pension systems around the world means it is much more comfortable to retire in Luxembourg than in Ireland; much better to be poor in New Zealand than in Germany; and much nicer to be nearing retirement and well-off in Italy than in the U.K. or the U.S.

The findings, published Monday by the Organization for Economic Co-operation and Development, show countries differ in the sustainability of their pension promises as societies age as well as the generosity and the amount of redistribution in their systems.

"Pension systems around the world are probably more diverse than any other element of tax and social security systems," said Edward Whitehouse, one of the authors of the OECD report.

The Paris-based body, charged with improving the economic performance of advanced countries, has been concerned that countries have largely focused pension reforms on improving fiscal sustainability and have often overlooked pension adequacy and redistribution in the process.

The good news for current workers, according to Whitehouse, is that pension systems are designed to provide an adequate income in nearly all advanced countries: "We are unlikely to see a resurgence of pensioner poverty if the current systems are stable." But there are many more differences across countries than there are similarities.

At one extreme, countries such as New Zealand and Ireland offer only a flat-rate state pension for all workers. This is worth much more to those on low earnings than those on high earnings.

In Ireland, employees on half average earnings can expect a retirement income after tax of 63 percent of their previous earnings, but workers earning twice average earnings can expect to retire on only 22 percent of their former earnings.

This type of scheme benefits from being cheap, simple and good at preventing poverty. But the lack of any link to earnings risks future Irish pensioners voting for political parties that promise higher benefits.

According to the OECD, the U.S. and the U.K. systems are similar in effect, redistributing heavily towards the poor, but as neither is flat-rate, they do not have the benefit of simplicity.

President Bush's suggestion last week that benefits payable under Social Security to richer employees should be reduced would make that system even more similar to a flat-rate pension scheme, but with even more complexity.

At the other extreme are countries, including many European nations, that relate state pensions closely to earnings. These give good benefits to workers on average earnings and above, but are expensive.

And in some countries, such as Germany and Italy, poorer employees lose out badly. The OECD estimates that German employees on half average earnings can expect to receive 62 percent of their after-tax incomes as a pension from the state, while those on 1½ times average earnings would receive 79 percent.