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Working Papers


Hazel Bateman

The increasing prevalence of funded private pension systems world- wide raises questions about how retirement savings and benefits should be taxed. The three most important questions in pension taxation are: (1) At what point should pension savings be taxed? (2) Should the tax regime for pensions be integrated with personal income taxes or be sepa- rate? (3) How preferential should the taxation of pensions be? Australia’s experience with the tax treatment of private retirement savings (known in Australia as superannuation) brings considerable insight to these questions.

Pension savings can be taxed at one or more of three points—at the time of contribution, as fund earnings accrue, and/or at the time ben- efits are received. Most countries exempt (E) contributions and fund earnings from taxation and tax (T) benefits under a postpaid expendi- ture tax (EET) regime. In most cases, the benefits are treated as ordinary income and taxed progressively under the personal income tax sched- ule. Some countries tax contributions and fund earnings under a com- prehensive income tax (TTE) regime. Alternatives include a prepaid expenditure tax (TtE) under which contributions are taxed, fund earn- ings are exempt (except for excess returns),and benefits are exempt, or a hybrid approach (TTT) whereby pension savings are taxed at all three points.


Keywords: Pension, savings, income tax, retirement savings, Australia

Elderly pensioners

Rafal Chomik and John Piggott

Tax expenditures occur when the tax treatment favors a certain activity. The forgone tax is thought to be analogous to spending and can thus attract commensurate attention. This concept was first articulated some 50 years ago by Stanley Surrey of the US Treasury Department (Surrey 1969), but exemptions to tax are as old as tax itself.1,2

As governments around the world look at ways to balance their budgets, tax expenditures will increasingly and justifiably come under scrutiny. This is particularly the case in countries with expanding funded pensions that seek to encourage self-provision for retirement or to main- tain neutrality between current and future consumption. Such arrangements can make the tax costs appear large and skewed toward the rich, while the benefits, which are far in the future, seem unsubstantiated.


Keywords: Tax expenditures, budgets, pensions, retirement, tax costs

Financial growth

Hazel Bateman, Ralph Stevens, Jennifer Alonso Garcia and Eduard Ponds

Using an online experimental survey we investigate perception (in terms of understanding, riskiness and control) and valuation (elicited using iterative multiple price lists) of lifetime annuities relative to flexible drawdown products. We find that for those participants who are engaged with the experimental tasks, information provision and an online calculator can substantially reduce or eliminate behavioral drivers of the complex task of valuation of annuities. Providing balanced information and multiple opportunities to learn about the key features of the products, including impact of potential outcomes, narrows the gap between the willingness to pay and willingness to accept, and, offsets the effects of low financial capability, information framing and real-world institutional settings.

Financial independence

Juergen Jung and Chung Tran

We study the optimal progressivity of a personal income tax system in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our results, based on a dynamic general equilibrium model calibrated to the US economy, indicate that accounting for health risk substantially aects the social insur- ance/redistribution role of a progressive income tax system. When health risk is present but access to health insurance is limited, the optimal income tax system is more progressive in order to provide more social insurance/redistribution to unhealthy low income individuals. However, when more inclusive health insurance systems are considered, such as Medicare for all, then the optimal level of tax progressivity decreases signicantly. Importantly, when health expenditure risk is eliminated, the optimal income tax progressivity becomes more similar to the optimal progressivity level in previous studies using models with income risk only.


Hanming Fang and Jin Feng

A detailed overview of the current state of the Chinese Pension System, as well as its development, its problems and some ideas for future reforms.

Mother and daughter

Yi Chen and Hanming Fang

Family planning plays a central role in contemporary population policies. However, little is known about its long-term consequences in old age because of the identification challenge. In this study, we examine how family planning affects the quality of life of the Chinese elderly. The direction of the effect is theoretically unclear. On the one hand, having fewer children allows parents to reallocate more resources to themselves, improving their well-being. On the other hand, having fewer children also leads to less care and companionship from children in old age. To empirically probe the effect of family planning, we identify the causal impact by exploiting the provincial heterogeneity in implementing the “Later, Longer, Fewer” policies in the early 1970s. We find that the policies greatly reduced the number of children born to each couple by 0.85. Parents also receive less support from children in terms of living arrangements, inter vivos transfers, and emotional support. Finally, we find that family planning has drastically different effects on elderly parent's physical and mental well-being. Whereas parents who are more exposed to the family planning policies consume more and enjoy slightly better physical health status, they report more severe depression symptoms. Our study calls for greater attention to the mental health status of the Chinese elderly.

Monetary growth

Jennifer Alonso Garcia, Hazel Bateman, Johan Bonekamp, Arthur van Soest and Ralph Stevens

We investigate the importance of alternative motives for choosing a saving and consumption trajectory after retirement. Using an online experimental survey, we elicit the impact on advised spending patterns and underlying saving motives of alternative retirement drawdown designs, comprising different combinations of annuity income and wealth, and of major life events such as becoming frail or losing a spouse. We find that individuals' saving motives are revised in anticipation of major life events. They are less responsive to variation in `experimental' retirement drawdown arrangements, remaining aligned to prevailing institutional arrangements. Our results suggest that the main explanations for the widespread behaviour of retirees to hold onto their wealth are the desire to hold precautionary savings for health and other unforeseen expenses, facilitating an intra-household bequest, and making it possible to enjoy life now as well as later.

Keywords: consumption smoothing, asset decumulation, saving motives, pension design

George Kudrna

George Kudrna, Chung Tran and Alan Woodland

A means-tested pension system has a distinct feature that tailors the level of pension benefits according to individual economic status. In the context of population aging with widening gaps in life expectancies, this feature generates an automatic adjustment mechanism that (i) mitigates the pressing fiscal cost of an old-age public pension program (fiscal stabilization device) and (ii) redistributes pension benefits to those in need with shorter life expectancies (redistributive device). To evaluate this automatic adjustment mechanism, we employ an overlapping generations model with population aging. Our results indicate that this novel mechanism plays an important role in containing the adverse effects of population aging on the fiscal costs and progressivity of a pension system. More pronounced aging scenarios further strengthen the role of this mechanism. A well-designed means test rule can create a sufficiently strong automatic mechanism to keep public pensions sustainable and equitable. Importantly, it is feasible to devise a pension reform that better adapts a means-tested pension system to more pronounced demographic trends, but does not lower the welfare of current and future individuals of all ages and income. Keywords: Population Aging, Sustainability, Social Security, Means Testing, Redistribution, Automatic Stabilizer, Overlapping Generations, Dynamic General Equilibrium.

Cepar - Retirement Decisions

Robert Holzmann and John Piggott

Abstract: The quest for better-designed pension schemes and effective pension system reforms has preoccupied policy makers and academic research- ers for the last several decades. The debate has swept across the globe, at times generating strong theoretical and policy arguments and creating reform leaders and followers. The notions of systemic and parametric pension reform that emerged with the debate suggest the depth of pro- posed reforms and the willingness to explore new ones.

Keywords: Pension schemes, pension, policy, taxation, reform