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Tax incentives for private life annuities and the social security reform: Effects on consumption and on adverse selection

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In this paper we analyse several measures which are typically included in a social security reform: a cut in the social security benefits, an increase in the social security tax and tax incentives for the purchase of private life annuities, which have recently become quite popular at the political level. In a two-period model with uncertainty about life-expectancy, it is shown that for a given annuity price tax incentives for life annuities increases consumption expenditures in old-age, while the opposite occurs by a cut in the social security benefits and by an increase of the social security tax. The main result is that a tax incentive for life annuities and a cut in the social security benefits alleviate adverse selection in the private annuity market, while an increase in the social security tax exacerbates adverse selection.

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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2002-09.

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Date of creation: Aug 2002
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Handle: RePEc:jku:econwp:2002_09

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Keywords: annuity market; uncertain lifetime; adverse selection; tax incentives; social security;

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Cited by:
  1. Susanne Pech, 2004. "Adverse Selection with individual- and joint-life annuities," Economics working papers 2004-12, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Johann Brunner & Susanne Pech, 2008. "Optimum taxation of life annuities," Social Choice and Welfare, Springer, vol. 30(2), pages 285-303, February.
  3. Susanne Pech, 2004. "Portfolio decisions on life annuities and financial assets with longevity and income uncertainty," Economics working papers 2004-14, Department of Economics, Johannes Kepler University Linz, Austria.

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