The budgetary and welfare effects of tax-deferred retirement saving accounts
AbstractThe present paper analyzes the budgetary, macroeconomic, and welfare effects of tax-deferred retirement saving accounts, similar to U.S. 401(k) plans, in a dynamic general-equilibrium overlapping-generations economy with heterogeneous households. Because of the initial deferral of tax payments, the short-run budgetary cost of tax-deferred accounts is significantly higher than the long-run cost. Therefore, the budget-neutral introduction of tax-deferred accounts would make current and near-future households worse off, although it would increase national wealth and total output in the long run. If the government spread the short-run cost to future households by increasing debt, the policy change could make all age cohorts, on average, as well off as the economy without tax-deferred accounts. Due to increased government debt and debt service costs, however, national wealth and total output would decrease in the long run. Thus, introducing tax-deferred accounts would not increase national wealth and improve social welfare at the same time. This is partly because the policy change is regressive and reduces the risk sharing effect of the current income tax system.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Public Economics.
Volume (Year): 95 (2011)
Issue (Month): 11 ()
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Web page: http://www.elsevier.com/locate/inca/505578
401(k) plans; IRA; Dynamic general equilibrium; Heterogeneous agents;
Find related papers by JEL classification:
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
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