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A Simple Model of Tax-Favored Retirement Accounts

  • Andras Simonovits

    ()

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

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.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0915.

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Length: 20 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:has:discpr:0915
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  1. Love, David A., 2007. "What can the life-cycle model tell us about 401(k) contributions and participation?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(02), pages 147-185, July.
  2. Hans Fehr & Christian Habermann & Fabian Kindermann, 2008. "Tax-Favored Retirement Accounts: Are they Efficient in Increasing Savings and Growth?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(2), pages 171-198, June.
  3. Diamond, Peter & Koszegi, Botond, 2003. "Quasi-hyperbolic discounting and retirement," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1839-1872, September.
  4. Emmanuel Saez, 2009. "Details Matter: The Impact of Presentation and Information on the Take-Up of Financial Incentives for Retirement Saving," American Economic Journal: Economic Policy, American Economic Association, vol. 1(1), pages 204-28, February.
  5. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1998. "The Effect of Tax-Favored Retirement Accounts on Capital Accumulation," American Economic Review, American Economic Association, vol. 88(4), pages 749-68, September.
  6. Stefan Homburg, 2006. "Coping with Rational Prodigals: A Theory of Social Security and Savings Subsidies," Economica, London School of Economics and Political Science, vol. 73(289), pages 47-58, 02.
  7. Feldstein, Martin, 1987. "Should Social Security Benefits Be Means Tested?," Scholarly Articles 2770498, Harvard University Department of Economics.
  8. Eric M. Engen & William G. Gale & John Karl Scholz, 1996. "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 113-138, Fall.
  9. R. Glenn Hubbard & Jonathan S. Skinner, 1996. "Assessing the Effectiveness of Saving Incentives," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 73-90, Fall.
  10. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  11. Feldstein, Martin S, 1987. "Should Social Security Benefits Be Means Tested?," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 468-84, June.
  12. Börsch-Supan, Axel & Reil-Held, Anette & Schunk, Daniel, 2008. "Saving incentives, old-age provision and displacement effects: evidence from the recent German pension reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 7(03), pages 295-319, November.
  13. Martin Neil Baily & Jacob Funk Kirkegaard, 2009. "US Pension Reform: Lessons from Other Countries," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4259, December.
  14. R. Glenn Hubbard & Jonathan S. Skinner, 1996. "Assessing the Effectiveness of Saving Incentives," Books, American Enterprise Institute, number 53540, 5.
  15. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 91-112, Fall.
  16. James Sefton & Justin vandeVen & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, vol. 118(528), pages 556-590, 04.
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