The previous indicator of the “Tax treatment of pensions and pensioners” showed the important role that the personal tax and social security contribution systems play in old-age income support. Pensioners often only pay health contributions and receive preferential treatment under the income tax. Tax expenditures and the progressivity of income taxes coupled with gross replacement rates of less than 100% also mean that pensioners have a lower income tax rate than workers. As a result, net replacement rates are generally higher than gross replacement rates.

For average earners, the net replacement rate across the Asian economies averages 55% for mandatory schemes, from a low of 41% in Pakistan to 88% in China (Table 2.3). Moreover, the pattern of replacement rates across countries is different on a net rather than a gross basis.

On average, for average earners, the net replacement rate is 5 percentage points higher than the gross replacement rate. The difference is 20 percentage points in China and around 5‑7 percentage points in India, Malaysia, Singapore and Viet Nam. In Hong Kong (China), Malaysia, the Philippines, Singapore, Sri Lanka and Thailand pension income is neither liable for taxes nor social security contributions.

For low earners, the effect of taxes and contributions on net replacement rates is slightly more muted than for workers higher up the earnings scale. This is because low-income workers typically pay less in taxes and contributions relative to average earners. In many cases, their retirement incomes are below the level of the standard reliefs in the personal income tax (allowances, credits, etc.). Thus, they are often unable to benefit fully from any additional concessions granted to pensions or pensioners under their personal income tax.

The difference between gross and net replacement rates for low earners is 6 percentage points on average. China has much higher replacement rates for low earners on a net basis than in gross terms being 25 percentage points higher. The net replacement rate for workers earning 200% of the average is highest in the Philippines. The lowest replacement rates for high earners are found in India, Pakistan and Thailand where workers earning 200% of the average will receive net pensions that amount to at most 25% of their net earnings when working.

The net replacement rate is defined as the individual net pension entitlement divided by net pre‑retirement earnings, taking account of personal income taxes and social security contributions paid by workers and pensioners. Otherwise, the definition and measurement of the net replacement rates are the same as for the gross replacement rate. Details of the rules that national tax systems apply to pensioners can be found in the online Country Profiles available at https://www.oecd.org/en/topics/sub-issues/public-pensions.html.