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Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: The case of Australia

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  • Iskhakov, Fedor
  • Keane, Michael

Abstract

We structurally estimate a life-cycle model of consumption, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of Australia’s Age Pension system and income tax policy on labor supply, consumption and retirement. Our model accounts for human capital, savings, uninsurable wage risk and credit constraints. We account for “bunching” of hours by assuming a discrete set of hours levels, and we investigate labor supply on both the intensive and extensive margins. Our model allows us to quantify the effects of anticipated and unanticipated tax and pension policy changes at different points of the life-cycle. Our results imply that Australia’s Age Pension system as currently designed is poorly targeted. Our simulations suggest that a doubling of taper rates, combined with a 5.9% reduction of income tax rates, would be budget neutral and Pareto improving.

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  • Iskhakov, Fedor & Keane, Michael, 2021. "Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: The case of Australia," Journal of Econometrics, Elsevier, vol. 223(2), pages 401-432.
    • Handle: RePEc:eee:econom:v:223:y:2021:i:2:p:401-432
    DOI: 10.1016/j.jeconom.2020.01.023
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    Cited by:

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    3. Julien Albertini & Arthur Poirier & Anthony Terriau, 2020. "The impact of EITC on education, labor market trajectories, and inequalities," Working Papers halshs-03082382, HAL.
    4. Maliar, Lilia & Maliar, Serguei, 2022. "Deep learning classification: Modeling discrete labor choice," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    5. Xinxin Ma, 2022. "Social Insurances and Risky Financial Market Participation: Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(10), pages 2957-2975, August.
    6. Owen Freestone & Robert Breunig, 2020. "Risk Aversion and the Elasticity of Intertemporal Substitution among Australian Households," The Economic Record, The Economic Society of Australia, vol. 96(313), pages 121-139, June.

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    More about this item

    Keywords

    Labor supply; Human capital; Retirement; Pensions; Income taxes; Dynamic structural model; Superannuation; Age Pension; Means tests;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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