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The budgetary and welfare effects of tax-deferred retirement saving accounts

  • Nishiyama, Shinichi

The 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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 11 ()
Pages: 1561-1578

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1561-1578
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. James M. Poterba & Steven F. Venti & David A. Wise, 1993. "Do 401(k) Contributions Crowd Out Other Persoanl Saving?," NBER Working Papers 4391, National Bureau of Economic Research, Inc.
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  9. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
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  12. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, 05.
  13. Kitao, Sagiri, 2010. "Individual Retirement Accounts, saving and labor supply," Economics Letters, Elsevier, vol. 108(2), pages 197-200, August.
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