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A Simple Model of Tax-Favored Retirement Accounts

Author

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  • Andras Simonovits

    () (Institute of Economics - Hungarian Academy of Sciences, Department of Economics - CEU, Mathematical Institute - Budapest University of Technology)

Abstract

To defend myopic workers against themselves, the government introduces a mandatory system but to help savers, it adds tax-favored retirement accounts. In a very simple model, where benefits are proportional to contributions, we compare three extreme systems: (i) the pure mandatory system, (ii) the asymmetric system, where only the savers participate in the voluntary system, (iii) the symmetric system, where both types participate proportionally to their wages. The symmetric voluntary system is welfare-superior to the asymmetric one as well as to the pure mandatory system, which in turn are equivalent to each other.

Suggested Citation

  • Andras Simonovits, 2009. "A Simple Model of Tax-Favored Retirement Accounts," IEHAS Discussion Papers 0915, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:0915
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    References listed on IDEAS

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    Cited by:

    1. Simonovits, András, 2011. "When are voluntary pensions indifferent?," Economics Letters, Elsevier, vol. 111(2), pages 155-157, May.

    More about this item

    Keywords

    mandatory pensions; tax-favored retirement accounts; voluntary contributions; subsidies.;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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