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Tax-Favored Retirement Accounts: Are they Efficient in Increasing Savings and Growth?

Listed author(s):
  • Hans Fehr
  • Christian Habermann
  • Fabian Kindermann

The present paper aims to quantify the macroeconomic and welfare effects of taxfavored retirement accounts. Starting from an equilibrium without saving incentives, we introduce such accounts and compute the new transition path and the resulting long-run equilibrium. Since our overlapping-generations model comprises a detailed progressive tax system, borrowing constraints as well as stochastic income risk, we can compare macroeconomic and liquidity effects, tax distortions and the insurance properties of the policy reform. Our simulations indicate that tax-favored retirement accounts as implemented in many OECD countries will have a significant impact on capital accumulation and wage growth in the long run, but only yield insignificant aggregate efficiency changes. While elderly generations are typically hurt by such a reform, young and future generations benefit. Finally, with respect to the intragenerational redistribution, a subsidy system that includes direct bonus payments might be preferred to a system with pure tax deductions.

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File URL: http://www.bgpe.de/texte/DP/012_habermann2.pdf
File Function: First version, 2006
Download Restriction: no

Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 012.

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Length: 29 pages
Date of creation: Jul 2006
Handle: RePEc:bav:wpaper:012_kindermann2
Contact details of provider: Web page: http://www.bgpe.de/

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  1. 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.
  2. 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.
  3. 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 263-286, April.
  4. Christopher Ragan, 1994. "Progressive Income Taxes and the Substitution Effect of RRSPs," Canadian Journal of Economics, Canadian Economics Association, vol. 27(1), pages 43-57, February.
  5. 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.
  6. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, July.
  7. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
  8. HUANG, HE & IMROHOROG[caron]LU, SELAHATTIN & SARGENT, THOMAS J., 1997. "Two Computations To Fund Social Security," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 7-44, January.
  9. M De Nardi & S Imrohoroglu & TJ Sargent, 2001. "Saving and pension reform in general equilibrium models," Oxford Review of Economic Policy, Oxford University Press, vol. 17(1), pages 20-39, Spring.
  10. 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.
  11. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
  12. Christian Habermann & Fabian Kindermann, 2007. "Multidimensional Spline Interpolation: Theory and Applications," Computational Economics, Springer;Society for Computational Economics, vol. 30(2), pages 153-169, September.
  13. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 83-114, June.
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