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The Taxation of Pensions: A Shelter Can Become a Trap

In: Frontiers in the Economics of Aging

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  • John B. Shoven
  • David A. Wise

Abstract

Pensions are widely thought to be attractive tax shelters which encourage saving for retirement. They allow people to save before-tax dollars and to compound investment returns without current taxation. However, the taxation of pension assets as they are distributed in retirement or as they pass through an estate may turn the shelter into a trap, at least for large pension accumulations. Pension distributions can face marginal tax rates as high as 61.5 percent; pension assets passing through an estate can face virtually confiscatory marginal tax rates between 92 and 99 percent. The analysis of this paper shows the circumstances under which these extraordinarily high marginal tax rates will be encountered. They are not limited to the rich. In fact, people of modest incomes who participate in a pension plan over a long career may face such rates. The paper presents a comprehensive examination of the taxation of pensions and discusses the optimal responses of households to the incentives created by the tax system.
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Suggested Citation

  • John B. Shoven & David A. Wise, 1998. "The Taxation of Pensions: A Shelter Can Become a Trap," NBER Chapters, in: Frontiers in the Economics of Aging, pages 173-212, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:7299
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    References listed on IDEAS

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    1. N. Gregory Mankiw & James M. Poterba, 1996. "Stock Market Yields and the Pricing of Municipal Bonds," NBER Working Papers 5607, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171, Elsevier.
    2. James M. Poterba & Andrew Samwick, 2001. "Household Portfolio Allocation over the Life Cycle," NBER Chapters, in: Aging Issues in the United States and Japan, pages 65-104, National Bureau of Economic Research, Inc.
    3. Poterba, James, 2001. "Estate and gift taxes and incentives for inter vivos giving in the US," Journal of Public Economics, Elsevier, vol. 79(1), pages 237-264, January.
    4. David A. Wise, 2001. "Introduction to "Aging Issues in the United States and Japan"," NBER Chapters, in: Aging Issues in the United States and Japan, pages 1-24, National Bureau of Economic Research, Inc.
    5. Poterba, James M., 1998. "Public Finance and Public Choice," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 391-96, June.
    6. Steven F. Venti & David A. Wise, 2001. "Choice, Chance, and Wealth Dispersion at Retirement," NBER Chapters, in: Aging Issues in the United States and Japan, pages 25-64, National Bureau of Economic Research, Inc.
    7. John B. Shoven, 1999. "The Location and Allocation of Assets in Pension and Conventional Savings Accounts," NBER Working Papers 7007, National Bureau of Economic Research, Inc.
    8. James Poterba, 1998. "Estate and Gift Taxes and Incentives for Inter Vivos Giving in the United States," NBER Working Papers 6842, National Bureau of Economic Research, Inc.
    9. Power, Laura & Rider, Mark, 2002. "The effect of tax-based savings incentives on the self-employed," Journal of Public Economics, Elsevier, vol. 85(1), pages 33-52, July.
    10. Peter A. Diamond, 1997. "Macroeconomics Aspects of Social Security Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 1-88.

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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