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Private Retirement Savings in Germany: The Structure of Tax Incentives and Annuitization

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  • Hans Fehr
  • Christian Habermann

Abstract

The present paper studies the growth, welfare and efficiency consequences of the recent introduction of tax-favored retirement accounts in Germany in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We focus on the implicit differential taxation of specific savings motives, the mandatory annuitization of benefits and the impact of special provisions for low-income households. The simulations indicate that the reform improves overall economic efficiency by about 0.6 percent of aggregate resources, but welfare decreases significantly for future generations. Finally, we show that special provisions could be very effective in raising the participation of low-income households despite their low budgetary cost.

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Bibliographic Info

Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 133.

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Length: 28 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp133

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Keywords: Individual retirement accounts; annuities; stochastic general equilibrium;

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References

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  1. Christian Habermann & Fabian Kindermann, 2007. "Multidimensional Spline Interpolation: Theory and Applications," Computational Economics, Society for Computational Economics, vol. 30(2), pages 153-169, September.
  2. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  3. Fehr, Hans & Habermann, Christian, 2008. "Welfare effects of life annuities: Some clarifications," Economics Letters, Elsevier, vol. 99(1), pages 177-180, April.
  4. Benjamin, Daniel J., 2003. "Does 401(k) eligibility increase saving?: Evidence from propensity score subclassification," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1259-1290, May.
  5. Marco Cagetti, 2001. "Interest Elasticity in a Life-Cycle Model with Precautionary Savings," American Economic Review, American Economic Association, vol. 91(2), pages 418-421, May.
  6. Dirk Krueger, 2006. "Public Insurance against Idiosyncratic and Aggregate Risk: The Case of Social Security and Progressive Income Taxation," CESifo Economic Studies, CESifo, vol. 52(4), pages 587-620, December.
  7. Bernheim, B. Douglas, 2002. "Taxation and saving," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 18, pages 1173-1249 Elsevier.
  8. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
  9. Mariacristina De Nardi, 2002. "Wealth inequality and intergenerational links," Staff Report 314, Federal Reserve Bank of Minneapolis.
  10. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2005. "Personal Security Accounts and Mandatory Annuitization in a Dynastic Framework," CESifo Working Paper Series 1405, CESifo Group Munich.
  11. Orazio P. Attanasio & Thomas DeLeire, 2002. "The Effect Of Individual Retirement Accounts On Household Consumption And National Saving," Economic Journal, Royal Economic Society, vol. 112(6), pages 504-538, July.
  12. Hans Fehr & Christian Habermann & Fabian Kindermann, 2006. "Tax-Favored Retirement Accounts: Are they Efficient in Increasing Savings and Growth?," Working Papers 012, Bavarian Graduate Program in Economics (BGPE).
  13. Rowena A. Pecchenino & Patricia S. Pollard, 1995. "The effects of annuities, bequests, and aging in an overlapping generations model of endogenous growth," Working Papers 1995-008, Federal Reserve Bank of St. Louis.
  14. Martin Feldstein, 1996. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc.
  15. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  16. Axel Börsch-Supan & Anette Reil-Held & Daniel Schunk, 2007. "The savings behaviour of German households: First Experiences with state promoted private pensions," MEA discussion paper series 07136, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  17. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, July.
  18. Warren Hrung, 2002. "Income Uncertainty and IRAs," International Tax and Public Finance, Springer, vol. 9(5), pages 591-599, September.
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Citations

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Cited by:
  1. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, vol. 157(4), pages 359-416, December.
  2. Hans Fehr & Fabian Kindermann, 2009. "Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes," CESifo Working Paper Series 2724, CESifo Group Munich.
  3. Hans Fehr & Christian Habermann, 2010. "Private retirement savings and mandatory annuitization," International Tax and Public Finance, Springer, vol. 17(6), pages 640-661, December.

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