3. Benefits – Values and Replacement Rates
The value of benefits provided under the different types of schemes varies across countries due to the existence of different and multiple pension programmes. Generally, values can be presented in both absolute and relative terms, i.e. as a percentage of average worker earnings. Replacement rates indicate the ratio of pensions to earnings. The gross replacement rate is defined as gross pension entitlement divided by gross pre-retirement earnings. The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking into account personal income taxes and social security contributions paid by workers and pensioners. Bismarckian systems are typically larger than Beveridgean systems. One explanation for this difference is that social contributions collected to finance the Bismarckian – earnings-related – benefits, cause smaller labour-supply distortions than a corresponding tax rate collected to finance Beveridgean benefits, as future benefits depend on past contributions.