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

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  • Nishiyama, Shinichi

Abstract

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.

Suggested Citation

  • Nishiyama, Shinichi, 2011. "The budgetary and welfare effects of tax-deferred retirement saving accounts," Journal of Public Economics, Elsevier, vol. 95(11), pages 1561-1578.
  • Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1561-1578
    DOI: 10.1016/j.jpubeco.2011.07.010
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:eecrev:v:98:y:2017:i:c:p:32-48 is not listed on IDEAS
    2. George Kudrna & Alan Woodland, 2012. "Progressive Tax Changes to Private Pensions in a Life-Cycle Framework," Working Papers 201209, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
    3. Kitao, Sagiri, 2015. "Pension reform and individual retirement accounts in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 111-126.
    4. Shinichi Nishiyama, 2013. "Fiscal Policy Effects in a Heterogeneous-Agent Overlapping-Generations Economy With an Aging Population: Working Paper 2013-07," Working Papers 44941, Congressional Budget Office.
    5. repec:eee:poleco:v:48:y:2017:i:c:p:104-127 is not listed on IDEAS
    6. Rydqvist, Kristian & Schwartz, Steven & Spizman, Joshua, 2011. "The Tax Benefit of Income Smoothing," CEPR Discussion Papers 8425, C.E.P.R. Discussion Papers.
    7. Anson T. Y. Ho & Jie Zhou, 2016. "Housing and Tax-Deferred Retirement Accounts," Staff Working Papers 16-24, Bank of Canada.
    8. repec:eee:eecrev:v:97:y:2017:i:c:p:26-41 is not listed on IDEAS

    More about this item

    Keywords

    401(k) plans; IRA; Dynamic general equilibrium; Heterogeneous agents;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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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