Abstract
The present paper studies the growth, welfare, and efficiency consequences of tax-favored retirement accounts in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We focus on the implicit differential taxation of savings motives and the mandatory annuitization of withdrawals after retirement. The simulations performed for the German economy indicate that the differential taxation of savings motives has only modest efficiency effects but especially low-income households benefit. On the other hand, mandatory annuitization improves overall economic efficiency significantly by about 0.4% of aggregate resources, but future generations are hurt due to intergenerational income effects from reduced accidental bequest.
Similar content being viewed by others
References
Attanasio, O. P., & DeLeire, T. (2002). The effect of individual retirement accounts on household consumption and national saving. Economic Journal, 112, 504–538.
Auerbach, A. J., & Kotlikoff, L. J. (1987). Dynamic fiscal policy. Cambridge: Cambridge University Press.
Bernheim, D. (2002). Taxation and saving. In A. J. Auerbach, & M. Feldstein (Eds.), Handbook of public economics (Vol. 3, pp. 1173–1250). Amsterdam: North-Holland.
Börsch-Supan, A., Reil-Held, A., & Schunk, D. (2008). Saving incentives, old-age provision and displacement effects: evidence from the recent German pension reform. Journal of Pension Economics and Finance, 7(3), 295–319.
Bomsdorf, E. (2003). Sterbewahrscheinlichkeiten der Periodensterbetafeln für die Jahre 2000 bis 2100. Köln: Eul.
Brown, J. R. (2003). Redistribution and insurance: mandatory annuitization with mortality heterogeneity. Journal of Risk and Insurance, 70(1), 17–41.
Cagetti, M. (2001). Interest elasticity in a life-cycle model with precautionary savings. American Economic Review, 91(2), 418–421.
Cagetti, M. (2003). Wealth accumulation over the life cycle and precautionary savings. Journal of Business and Economic Statistics, 21(3), 339–353.
Cecchetti, S. G., Lam, P.-S., Mark, N. C. (2000). Asset pricing with distorted beliefs: are equity returns too good to be true? American Economic Review, 90(4), 787–805.
De Nardi, M. (2004). Wealth inequalities and intergenerational links. Review of Economic Studies, 71, 743–768.
Deutsches Institut für Wirtschaftsforschung (DIW) (2005). Verteilung von Vermögen und Einkommen in Deutschland. Wochenbericht des DIW Berlin, 11, 199–207.
Epstein, L. G., & Zin, S. E. (1991). Substitution, risk aversion, and the temporal behavior of consumption and asset returns: an empirical analysis. Journal of Political Economy, 99, 263–286.
Fehr, H. (1999). Welfare effects of dynamic tax reforms. Tuebingen: Mohr Siebeck.
Fehr, H., & Habermann, C. (2008a). Welfare effects of life annuities: some clarifications. Economics Letters, 99, 177–180.
Fehr, H., & Habermann, C. (2008b). Private retirement savings in Germany: the structure of tax incentives and annuitization (CESifo Working Paper No. 2238). Munich.
Fehr, H., & Thøgersen, Ø. (2009). Social security and future generations. In R. Brent (Ed.), Handbook of research on cost-benefit analysis (pp. 417–454). Cheltenham: Edward Elgar.
Fehr, H., Habermann, C., & Kindermann, F. (2008). Tax-favored retirement accounts: are they efficient in increasing savings and growth? FinanzArchiv, 64(2), 171–198.
Feldstein, M. (1997). The costs and benefits of going from low inflation to price stability. In C. Romer, & D. Romer (Eds.) Reducing inflation (pp. 123–156). Chicago: University of Chicago Press.
Fuster, L., İmrohoroğlu, A., & İmrohoroğlu, S. (2008). Personal security accounts and mandatory annuitization in a dynastic framework. In R. Fenge, G. de Menil, & P. Pestieau (Eds.), Pension strategies in Europe and the United States (pp. 211–238). Cambridge: MIT Press.
Gong, G., & Webb, A. (2008). Mortality heterogeneity and the distributional consequences of mandatory annuitization. Journal of Risk and Insurance, 75(4), 1055–1079.
Hrung, W. B. (2002). Income uncertainty and IRAs. International Tax and Public Finance, 9(5), 591–599.
İmrohoroğlu, A., İmrohoroğlu, S., & Joines, D. H. (1998). The effect of tax-favored retirement accounts on capital accumulation. American Economic Review, 88(4), 749–768.
Institut der deutschen Wirtschaft (IdW) (2007). Deutschland in Zahlen. Köln.
Krueger, D. (2006). Public insurance against idiosyncratic and aggregate risk: the case of social security and progressive income taxation. CESifo Economic Studies, 52, 587–620.
Mackenzie, G. A. (2006). Annuity markets and pension reform. Cambridge: Cambridge University Press.
Nishiyama, S., & Smetters, K. (2005). Consumption taxes and economic efficiency with idiosyncratic wage shocks. Journal of Political Economy, 113, 1088–1115.
OECD (2004). Tax-favored retirement saving. OECD Economic Studies No. 39, Paris.
Pecchenino, R. A., & Pollard, P. S. (1997). The effects of annuities, bequest, and aging in an overlapping generations model of endogenous growth. Economic Journal, 107, 26–46.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Fehr, H., Habermann, C. Private retirement savings and mandatory annuitization. Int Tax Public Finance 17, 640–661 (2010). https://doi.org/10.1007/s10797-010-9141-0
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10797-010-9141-0