Some Implications of Changing the Tax Basis for Pension Funds

Abstract

Governments in many developed economies provide private pension plans with significant taxation incentives. However, as many retirement income systems are now being reviewed due to demographic, social and economic pressures, these taxation arrangements are also under scrutiny. This paper discusses some of the implications of the differences between the traditional taxation treatment adopted by most OECD nations and that adopted by Australia, where there is a tax on contributions, a tax on investment earnings and a tax on benefits. The results show that there are significant differences in the net value of the benefits received by individuals and the taxation revenue received by the government. On the other hand, it is shown that there is remarkably little to distinguish between the two tax structures in terms of summary measures of lifetime income, although the form in which the benefit is taken in retirement is significant in influencing intragenerational equity.JEL classification: D31, E27.

Progressive Tax Changes to Superannuation in a Lifecycle Framework

“…The analysis of the shift to the EET regime by Doyle et al (1999) show only a small net loss in tax revenues as the revenue loss from the abolition of contribution and fund earning taxes is partly o¤set by imposing the marginal income tax rates on superannuation bene…ts. Atkinson et al (1999), using a cohort micro-simulation model, …nd that the traditional EET regimes scores better in terms of intra-generational equity and overall progressivity than the concessional TTT regime in Australia at that time. Their main …nding, however, is that the assumed behaviour at retirement (i.e., whether the superannuation savings are paid out as an annuity or a lump-sum) has much stronger e¤ects on the redistributive measures than the superannuation tax structure.…”

“…These contributions net of the contribution tax, s cr; are added to the stock of superannuation assets, SA i a;t ; that earns fund income at the after-tax interest rate, (1 r ) r. Superannuation assets are assumed to be kept in the fund until households reach age 60. The households aged 60 years and over can draw down their superannuation savings as pensions, SB i a;t , which become part of the perperiod budget constraint de…ned in (2)…”

“…2 ;where i is set to 0.26 for the lowest quintile, 0.55 for the second quintile, one for the third quintile, 1.52 for the fourth quintile and 2.63 for the highest quintile. These values are the ratios of the private incomes of lower and higher quintiles to the private income of the third quintile, calculated from ABS (2007) -Table7, p.22.…”

“…Note that the e¤ective fund earnings tax rate is about 7.1 percent, which is due to imputation credits on dividend incomes and the capital gains tax discount (Yoo and de Serres, 2004) 2. The Australian personal income taxation system is progressive with …ve tax brackets.…”