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Special Issue:
Tax-favoured retirement saving
The US fiscal gap and retirement saving
Alan J. Auerbach, William G. Gale and Peter R. Orszag
Because of the strikingly large long-term fiscal gaps being projected recently for the United States, researchers have searched for hidden assumptions underlying revenue projections that might be biasing the results. In this paper, we address the extent to which alternative projections of activity in, and revenues from, taxpreferred retirement accounts quantitatively affect estimates of the long-term fiscal gap. In doing so, we review previous contributions on this topic, beginning with Boskin (2003), our own initial contribution on the subject (Auerbach, Gale and Orszag, 2003), and a more recent analysis by the Congressional Budget Office (CBO, 2004). Using Boskin’s projections, we estimate that only a very small adjustment to standard revenue assumptions is called for. The results of the CBO analysis, we argue, indicate that an even smaller adjustment is needed. Thus, neither of these contributions changes the conclusion that the United States faces a substantial fiscal gap.
Long-term budgetary implications of tax-favoured retirement saving plans
Pablo Antolin, Alain de Serres and Christine de la Maisonneuve
This paper projects the evolution over time of fiscal costs and revenues related to tax-favoured retirement saving regimes in 17 OECD countries. In so doing, it takes into account current and future contributions, asset accumulation and withdrawals, all of which will be strongly influenced by future demographic developments. The main results show that if tax incentives are assumed to lead essentially to saving diversion rather than creation, the net budgetary cost of tax-favoured schemes would remain large in most countries, despite the sharp rise in revenues collected from withdrawals as population ages. The paper shows that this cost would significantly be reduced if tax-favoured schemes succeed in promoting additional private savings. It then explores a number of policy options to raise the amount of additional saving.
Tax treatment of private pension savings in OECD countries
Kwang-Yeol Yoo and Alain de Serres
This paper provides, for all OECD countries, an estimate of the net tax cost per currency unit of contribution to a tax-favoured retirement savings plan, using a present-value methodology. The latter takes into account the future flows of revenues foregone on accrued income and of revenues collected on benefit withdrawals corresponding to a unit contribution made in a given year. The net tax cost is first calculated for nine (five-year) age groups, which have different relative income levels and investment time horizons, and is then averaged across age groups. In order to take into consideration the relevant country-specific features of savings taxation, the paper also provides an overview of the tax treatment of private pension arrangements and alternative savings vehicles. The results indicate that the size of tax subsidy varies significantly across countries, ranging from nearly 40 cents per unit of contribution (Czech Republic) to around zero (Mexico, New Zealand). Over half of the OECD countries incur a tax cost of more than 20 cents, but most OECD countries incur at least 10 cents of the net tax cost per unit of Contribution. On the basis of contributions made in 2000, this paper finds that, the present-value estimates of overall budgetary cost of tax-favoured private pensions, vary from over 1.7 per cent of GDP (Australia, Ireland, United Kingdom) to less than 0.2 per cent of GDP (Japan, Slovak Republic).
Mind the gap: the effectiveness of incentives to boost retirement saving in Europe
Axel Börsch-Supan
The extent of private retirement saving varies a great deal across Europe. This variation reflects, among other factors, the differences in public pension systems, taxation and capital market regulations. This paper exploits this variation to study the effectiveness of the various incentives to boost retirement saving. While we find a strong correlation between the generosity of pay-as-you-go pensions and retirement saving, there is no straight correlation between the volume of retirement saving and the extent to which it is tax-favoured. The paper also uses the recent reforms in Germany as “experiments” that shed light on which incentives might work and which might fail. We describe the introduction of the tax-favoured “Riester pension plans” in 2001 and the 2004 tax reform, which introduces deferred taxation. In spite of a deep subsidy and a generous tax treatment, Riester pension plans have not found much attraction, while whole life insurance is still widespread in spite of reduced tax favours. We conclude that boosting retirement saving requires more than simply tax relief.
Effectiveness of tax incentives to boost (retirement) saving: theoretical motivation and empirical evidence
Orazio P. Attanasio, James Banks and Matthew Wakefield
The adequacy of household saving for retirement has become a policy issue all around the world. The UK and US have been in the vanguard of those countries that have tried to encourage retirement saving by providing tax-favoured treatment for particular savings accounts. We consider empirical evidence from these two countries regarding the extent to which funds in some specific tax advantaged accounts (IRAs in the US, TESSAs and ISAs in the UK) represent new savings. Our best interpretation of this evidence is that: only relatively small fractions of these funds can be considered to be “new” saving and so these policies have been an expensive means of encouraging saving; there has been some deadweight loss from the policies associated with “reshuffling” of existing savings. Continuing improvements in data on individual financial behaviour create scope for future empirical analysis of incentives to save, both within the standard economic framework that we explain and exploit, and by considering extensions to and adaptations of it.
Pension savings and government finance in the Netherlands
Casper van Ewijk
The large accumulated savings in funded pension schemes contribute significantly to the sustainability of government finance in the Netherlands. The implicit tax claim on pension wealth balances current public debt, and the expected rise in tax revenues from pension income compensates for more than half of the future burden of population ageing. The positive contribution of – past – pension savings to government finance does not necessarily imply that also future pension savings have a favourable impact on government finance. On the contrary, applying a general equilibrium OLG model for the Netherlands we find considerable positive effects of a downsizing of mandatory pensions on the government budget. The impact on the economy is ambiguous, however, and depends on which generations bear the burden of this pension reform.
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