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Tax-Preferred Savings Accounts and Marginal Tax Rates: Evidence on RRSP Participation


  • Kevin Milligan


The percentage of Canadian with earned income who contributed to a Registered Retirement Savings Plan increased from 18.7 per cent in 1982 to 46.0 per cent in 1996. This period also saw many changes to the income tax structure. Using household expenditure survey data, I examine the influence of taxes on the decision to contribute to Registered Retirement Savings Plans. I improve on existing work by identifying the tax effect from within jurisdiction variation through time, rather than cross-sectional variation alone. I find that taxes do play a role in the contribution decision, but the effect of taxes is much smaller than suggested by the existing literature. A 10 percentage point increase in the marginal tax rate is estimated to increase the probability of participation by 8 per cent. This suggests that increases in marginal tax rates can explain only 5.1 per cent of the increase in Registered Retirement Savings Plan participation between 1982 and 1996. A carryforward mechanism for unused contribution room was introduced in 1991. I find evidence that the sensitivity of participation to future marginal tax rates increased after the introduction of the carryforward. This is consistent with the predictions of the model.

Suggested Citation

  • Kevin Milligan, 2001. "Tax-Preferred Savings Accounts and Marginal Tax Rates: Evidence on RRSP Participation," Social and Economic Dimensions of an Aging Population Research Papers 52, McMaster University.
  • Handle: RePEc:mcm:sedapp:52

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    References listed on IDEAS

    1. Ronald Lee & Jonathan Skinner, 1999. "Will Aging Baby Boomers Bust the Federal Budget?," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 117-140, Winter.
    2. Denton, Frank T. & Gafni, Amiram & Spencer, Byron G., 1995. "The SHARP way to plan health care services: A description of the system and some illustrative applications in nursing human resource planning," Socio-Economic Planning Sciences, Elsevier, vol. 29(2), pages 125-137, June.
    3. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-241, May.
    4. Frank T. Denton & Byron G. Spencer, 1999. "Population Aging and Its Economic Costs: A Survey of the Issues and Evidence," Social and Economic Dimensions of an Aging Population Research Papers 1, McMaster University.
    5. Ronald Lee & Shripad Tuljapurkar, 1997. "Death and Taxes: Longer life, consumption, and social security," Demography, Springer;Population Association of America (PAA), vol. 34(1), pages 67-81, February.
    6. Ronald Lee & Shripad Tuljapurkar, 1998. "Stochastic Forecasts for Social Security," NBER Chapters,in: Frontiers in the Economics of Aging, pages 393-428 National Bureau of Economic Research, Inc.
    7. Frank T. Denton & Amiram Gafni & Byron G. Spencer, 2001. "Population Change and the Requirements for Physicians: The Case of Ontario," Canadian Public Policy, University of Toronto Press, vol. 27(4), pages 469-485, December.
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    Cited by:

    1. Håkan Selin, 2012. "Marginal Tax Rates and Tax‐Favoured Pension Savings of the Self‐Employed: Evidence from Sweden," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(1), pages 79-100, March.
    2. Engelhardt, Gary V. & Madrian, Brigitte C., 2004. "Employee Stock Purchase Plans," National Tax Journal, National Tax Association, vol. 57(2), pages 385-406, June.
    3. Michael Baker & Jonathan Gruber & Kevin Milligan, 2007. "Simulating the Response to Reform of Canada," NBER Chapters,in: Social Security Programs and Retirement around the World: Fiscal Implications of Reform, pages 83-118 National Bureau of Economic Research, Inc.
    4. Juan Ayuso & Juan F. Jimeno & Ernesto Villanueva, 2007. "The effects of the introduction of tax incentives on retirement savings," Working Papers 0724, Banco de España;Working Papers Homepage.
    5. Sule Alan & Kadir Atalay & Thomas F. Crossley, 2006. "Do the Rich Save More in Canada?," Quantitative Studies in Economics and Population Research Reports 406, McMaster University.
    6. Alan, Sule & Atalay, Kadir & Crossley, Thomas F. & Jeon, Sung-Hee, 2010. "New evidence on taxes and portfolio choice," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 813-823, December.
    7. Michael Baker & Jonathan Gruber & Kevin Milligan, 2003. "Simulating the Response to Reform of Canada's Income Security Programs," NBER Working Papers 9455, National Bureau of Economic Research, Inc.

    More about this item


    retirement savings plan; income tax rates;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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