This chapter assesses whether the design of financial incentives in different countries provides a tax advantage when people save for retirement. It calculates the tax advantage that individuals saving into retirement savings plans may enjoy over their lifetime. This overall tax advantage is the amount that an individual would save in taxes paid by contributing to a retirement savings plan instead of putting the same amount into an alternative benchmark savings vehicle. It includes the effect of both tax and non-tax financial incentives, and it is calculated for different types of plans across 42 OECD and selected non-OECD countries.
Financial Incentives and Retirement Savings
Chapter 3. Does the design of financial incentives provide a tax advantage when people save for retirement?
Abstract
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
The design of financial incentives to promote savings for retirement varies greatly across countries. As shown in Chapter 2, half of the OECD countries apply a variant of the “Exempt-Exempt-Taxed” (“EET”) tax regime that exempts contributions and returns on investment from taxation while taxing pension benefits and withdrawals as income. Yet a wide range of other tax regimes can be found as well, from the “EEE” tax regime where contributions, returns on investment and pension income are all tax exempt, to regimes where two of three flows are taxed. In addition, among OECD countries, nine offer government matching contributions and five use government subsidies to promote private pensions.
This chapter assesses whether the design of financial incentives in different OECD and non-OECD countries provides a tax advantage when people save for retirement. It calculates the tax advantage that individuals contributing to retirement savings plans may enjoy over their lifetime. It calculates this overall tax advantage for different types of retirement savings plan across 42 OECD and selected non-OECD countries. The approach used consists in comparing the tax treatment of a retirement savings plan to that of a benchmark savings vehicle, i.e. comparing how contributions, returns on investment and withdrawals are taxed in each savings vehicle. The tax advantage calculation includes the effect of government non-tax incentives, such as fixed nominal subsidies and matching contributions, which are treated as refundable tax credits paid into the pension accounts of entitled individuals. The overall tax advantage therefore represents the amount that an individual would save in taxes paid during their working and retirement years by contributing the same amount (before tax) to a retirement savings plan instead of to a benchmark savings vehicle.
In the 42 countries analysed, the design of financial incentives does indeed provide a tax advantage when people save into retirement plans instead of into other traditional savings vehicles. The size of the overall tax advantage varies, however, and depends on the tax regime applied to retirement plans and savings vehicles, as well as on the characteristics of the personal income tax system (i.e. the tax brackets and the tax rates), the income level, the amount saved, the length of the contribution period, the type of post-retirement product, the benchmark savings vehicle chosen as a comparator and other financial and economic parameters.
Before providing country-specific results in Section 3.2, Section 3.1 first explores the mechanisms through which the current main approach to designing financial incentives (the “EET” tax regime) may provide a tax advantage to individuals contributing to retirement savings plans. This section introduces the approach used to calculate the overall tax advantage and conducts a sensitivity analysis to help explain how different factors may influence the results. Section 3.2 then calculates the amount of tax saved by individuals in 42 OECD and non-OECD countries when contributing to a retirement plan instead of to a benchmark savings vehicle. The overall tax advantage is calculated for all types of private pension plan existing in the analysed countries, as long as the financial incentive is designed differently. Section 3.3 concludes. Finally, Annex 3.A provides the full description of the framework and assumptions.
3.1. How financial incentives provide a tax advantage to individuals
This section first introduces the approach used to calculate the overall tax advantage when people save for retirement. It then calculates the overall tax advantage for the “EET” tax regime and looks at how it varies for different levels of income, lengths of the contribution period, contribution rates, tax-deductibility ceilings, post-retirement products and financial and economic parameters (inflation, productivity growth, rate of return and discount rate). It ends with a summary of the main findings.
How to calculate the overall tax advantage
This sub-section introduces the approach used to calculate the overall tax advantage that results from the tax regime of retirement savings. The calculation consists in comparing the tax treatment of a pension plan to that of a benchmark savings vehicle, i.e. comparing how contributions, returns on investment and withdrawals are taxed in each case.1
Traditional forms of savings are taxed the same way as other income and earnings. Saving, including for retirement, involves three income flows: contributions, returns on investment and withdrawals. In general, contributions are paid from after-tax earnings; the investment income generated is taxed; and withdrawals are exempt from taxation. This is generally referred to as the “Taxed-Taxed-Exempt” or “TTE” tax regime.
Table 3.1 illustrates how much tax would be paid under two tax regimes that commonly apply to traditional savings vehicles (“TTE”) and to retirement savings plans (“EET”). The calculations assume that an initial contribution of EUR 1 000 is invested for 10 years and earns a constant 5% return. The individual is subject to a 25% marginal tax rate that remains constant over time. The discount rate is set equal to the rate of return to calculate the present value of tax paid. Under the “TTE” tax regime, the individual pays EUR 250 in tax when the contribution is made, so that, after tax, only EUR 750 are actually invested. At the end of each year, the individual also pays taxes on investment income, amounting in total to EUR 84.7 in present value. Upon withdrawal, no tax is due and the after-tax withdrawal is equal to EUR 1 083.8.
Under the “EET” tax regime, tax is only due upon withdrawal. The present value of tax paid amounts to EUR 250 and the after-tax withdrawal to EUR 1 221.7. The individual therefore pays EUR 84.7 less in taxes in present value terms when contributing to an “EET” plan rather than to a “TTE” plan. The difference in after-tax withdrawal is also equal to EUR 84.7 in present value. Provided the discount rate is equal to the rate of return, the benefit that accrues to the individual can be expressed as either a tax advantage or as a retirement income advantage.
Table 3.1. Overall tax advantage: illustration (in EUR)
Note: “E” stands for exempt, “T” for taxed and “PV” for present value. The calculations assume that an initial contribution of EUR 1 000 is invested for 10 years and earns a constant 5% return. The individual is subject to a 25% marginal tax rate, constant over time. The discount rate is equal to the rate of return.
The analysis calculates the “overall tax advantage”, by extending the simulation to the entire lifetime of the individual and considering the particularities of different tax regimes.2 The overall tax advantage should not be confused with the incentive to save (Box 3.1). The overall tax advantage is defined as the difference in the present value of total tax paid on contributions, returns on investment and withdrawals when an individual saves in a benchmark savings vehicle or in an incentivised retirement plan, given a constant contribution rate during the entire career. It is expressed as a percentage of the present value of pre-tax contributions. The overall tax advantage represents the amount saved in taxes paid by an individual over their working and retirement years when contributing the same amount (before tax) to an incentivised pension plan rather than to a benchmark savings vehicle. The impact of both tax and non-tax incentives is reflected in the overall tax advantage by evaluating non-tax incentives as refundable tax credits paid into the pension account.
Box 3.1. Difference between the overall tax advantage and the incentive to save
A positive overall tax advantage means that the individual pays less taxes when contributing to an incentivised retirement plan rather than to a benchmark savings vehicle. It does not mean that the individual has an incentive to save. The overall tax advantage and the incentive to save are two different measures.
The incentive to save is measured by the after-tax rate of return. A tax system is neutral when the way present and future consumption is taxed makes the individual indifferent between consuming and saving. This is achieved when the after-tax rate of return is equal to the before-tax rate of return.
Taxing returns creates a disincentive to save because the present value of the income is greater if it is used for consumption today than if it is used for consumption tomorrow (Mirrlees et al., 2011[1]). A “TTE” tax regime therefore incentivises consumption rather than savings. In the example from Table 3.1, the after-tax rate of return with the “TTE” tax regime is equal to 3.75%, which is lower than the before-tax rate of return of 5%.
By contrast, an “EET” tax regime is neutral between saving and consuming (the after-tax rate of return is equal to 5%), provided that the individual faces a constant personal income tax rate over time. When the tax rate on withdrawals is lower than the tax rate at which contributions were deducted, the after-tax rate of return is greater than the before-tax rate of return, creating an incentive to save. When the opposite is true, for example due to a loss of entitlement to a means-tested public pension, the after-tax rate of return is lower than the before-tax rate of return, leading to an incentive to consume.
Upfront taxation of retirement savings, “TEE”, also achieves tax neutrality between saving and consuming, as long as returns are not above the “normal return to saving”. The normal return to saving is the return that just compensates for delaying consumption. It is also often called the risk-free return (Mirrlees et al., 2011[1]).
Therefore, the tax treatment of retirement savings may lead to a positive overall tax advantage, independently of whether the individual has an incentive to save, is indifferent between saving and consuming, or has a disincentive to save (i.e., the after-tax rate of return is larger, equal or lower than the before-tax rate of return).
During working life, the analysis assumes that wage income is the only source of income. Marginal tax rates are derived by determining the income tax bracket in which the individual’s wage falls every year. Wages are assumed to grow in line with inflation and productivity (both assumed to be constant over time), as do the income limits for the income tax brackets.3 When contributions or returns on investment are subject to personal income tax, the tax rate that implicitly applies to them is the marginal tax rate, i.e. the tax rate that an individual would pay on the latest unit of income earned.
During retirement, the analysis assumes that the only sources of income are pensions, both mandatory public pensions and the pension benefits from the private pension plan. The comparison made with respect to the benchmark savings vehicle substitutes the income from the private pension plan with the income from this alternative savings vehicle. The level of mandatory public pension that the individual may be entitled to is calculated by applying the OECD average gross replacement rate derived from the OECD pension models to the last wage (OECD, 2017[2]). The analysis assumes that public pensions grow in line with inflation and are fully subject to personal income tax. The tax due during retirement is therefore calculated by applying the corresponding rates to each income tax bracket up to the individual’s total taxable pension income (i.e. public plus private pensions in the case of the private pension plan, versus public pensions only in the case of the benchmark savings vehicle).
The rest of the section calculates the overall tax advantage for a hypothetical defined contribution funded pension plan to which the “EET” tax regime applies. The benchmark savings vehicle is a traditional savings account to which the “TTE” tax regime applies. As a baseline, the calculations assume that the average earner enters the labour market at age 20 in 2018 and contributes 5% of wages yearly until age 65. The total amount of assets accumulated at retirement is converted into an annuity certain with fixed nominal payments.4 5 Inflation is set at 2% annually, productivity growth at 1.25%, the real rate of return on investment at 3% and the real discount rate at 3%.6
Figure 3.1. Overall tax advantage for an “EET” tax regime
Note: “E” stands for exempt and “T” for taxed.
Comparing the taxes paid under the “EET” and “TTE” tax regimes for each income flow produces a positive overall tax advantage for the average earner. Figure 3.1 shows that, under the “EET” tax regime, the individual enjoys a preferential tax treatment on contributions and returns on investment as compared to the “TTE” tax regime. This preferential tax treatment outweighs the taxation of pension benefits and withdrawals, thereby providing an overall tax advantage to the individual when contributing to an “EET” retirement plan rather than to a “TTE” traditional savings account.
Impact of the level of income
The first sensitivity analysis looks at the impact of changing the way in which the tax rate during the retirement period is determined. Instead of using the total taxable pension income (public and private pensions), one could assume that the individual’s income remains in the same tax bracket at retirement. Then the analysis turns to the overall tax advantage for individuals on different income levels under both assumptions.
The overall tax advantage provided by the “EET” tax regime, as compared to a “TTE” benchmark, is essentially equivalent to exempting returns on investment from tax when tax rates are the same at the time of contribution and withdrawal. Under that assumption, the reduction in taxes paid on contributions is exactly equal, in present value, to the increase in taxes paid on withdrawals, regardless of the income of the individual saver. As is illustrated in the left panel of Figure 3.2, the tax advantage on contributions (blue bars) is equal to the tax advantage on withdrawals (light-blue bars), with opposite signs. The overall tax advantage (black crosses) is therefore equal to the tax advantage on returns (grey bars), for all income levels. Also, the after-tax rate of return is equal to the before-tax rate of return and the tax regime provides neutrality between saving and consuming to all individuals (see Box 3.1).
Figure 3.2. Overall tax advantage for an “EET” tax regime, by income level and components
Note: On the left panel, each individual remains in the same tax bracket over working and retirement years. On the right panel, the tax rate during retirement is defined according to the level of taxable pension income (including public pensions).
The link between the overall tax advantage provided by an “EET” tax regime and the income level of the individual depends on the structure of the personal income tax system. In countries where all individuals have their entire income taxed at the same rate, the overall tax advantage provided by the “EET” tax regime is the same across the income scale. When personal income tax rates increase with taxable income, the overall tax advantage increases with income through higher marginal tax rates. Indeed, individuals with higher marginal tax rates benefit more relative to a taxable alternative on every unit of investment income to which a zero rate of tax applies. However, the amount of investment income that would have been generated by an after-tax contribution into a benchmark “TTE” savings account is lower for individuals with higher marginal tax rates. The result is that the overall tax advantage increases with marginal tax rates, but the rate of increase slows as the marginal tax rate increases (Brady, 2012[3]). This is illustrated in the left panel of Figure 3.2. It is however noteworthy that individuals not paying taxes do not get any tax advantage.
The relative level of retirement income compared to income from work affects the link between the overall tax advantage provided by the “EET” tax regime, and the level of income. Retirement income is usually lower than income from work, hence retirement income is likely to be taxed at a lower average rate than income from work. Therefore, when considering the total taxable pension income to determine the tax rate during the retirement period, the tax paid on withdrawals may not fully offset the initial tax relief on contributions and the overall tax advantage is larger than when the tax rate remains constant over the lifetime (see right panel of Figure 3.2). This also means that the tax regime incentivises saving, in particular for middle to upper-middle income earners (the after-tax rate of return is greater than the before-tax rate of return, see Box 3.1). The right panel of Figure 3.2 shows that the overall tax advantage increases significantly for individuals earning between 80% and 2 times the average earnings when they face lower tax rates during retirement than while working. For high-income earners, there is a convergence towards tax neutrality because the higher the income level, the less likely is the individual to experience a fall in tax rate at retirement.
Impact of the length of the contribution period
The overall tax advantage of contributing to an “EET” retirement plan rather than to a “TTE” traditional savings account increases with the length of the contribution period. Figure 3.3 shows the overall tax advantage for three different lengths of the contribution period: 45 years (baseline, from age 20 to 65), 40 years (late entry at age 25 or early retirement at age 60) and 50 years (delayed retirement to age 70). The longer the contribution period, the larger the overall tax advantage provided by the “EET” tax regime. For example, for an average earner, the present value of taxes saved represents 35% of the present value of contributions after 40 years of contributions, 37% after 45 years and 39% after 50 years. Early retirement and late entry for the same length of the contribution period provide similar results.
The main driver of this result is the compound interest. When returns on investment in private pension plans are tax exempt, the tax advantage on returns on investment is positive. The longer the contribution period is, the longer the investment income can accumulate and the larger the tax advantage on returns is. The tax advantages on contributions and on withdrawals also vary with the length of the contribution period, but the variations are not significant when expressed as a percentage of the present value of contributions. Because of the compound interest, returns on investment increase in a larger proportion than contributions and withdrawals when the contribution period is longer. Therefore, the variation in the tax advantage on returns is the main driver of the variation in the overall tax advantage when the length of the contribution period changes.
Figure 3.3. Overall tax advantage for an “EET” tax regime, according to the length of the contribution period, average earner
Impact of the contribution rate
The overall tax advantage varies with changes in the contribution rate. When there are no limits to the amount of contributions attracting tax relief, increasing the contribution rate from 5% to 10% reduces the overall tax advantage provided by the “EET” tax regime. A higher contribution rate leads to higher pension payments during retirement. This increases the share of total taxable pension income in the last income tax bracket, and thereby the average tax rate applied to total taxable pension income, and the tax paid on withdrawals. The tax advantage on withdrawals is therefore more negative with a higher contribution rate (see Figure 3.4). By contrast, the tax advantage on contributions and on returns do not vary with the contribution rate as the tax advantage is expressed as a percentage of the present value of contributions.
Figure 3.4. Overall tax advantage for an “EET” tax regime, according to the contribution rate, average earner
Impact of ceilings on tax-deductible contributions
The impact of introducing a ceiling on tax-deductible contributions depends on whether individuals make excess contributions. Figure 3.5 compares the overall tax advantage across different income groups, when there is no ceiling on the tax-deductibility of contributions and when a ceiling is introduced, with and without the possibility to make excess contributions. When excess contributions are allowed, introducing a ceiling reduces the amount of taxes saved only for individuals who contribute beyond the ceiling. The ceiling has no impact on the overall tax advantage as long as contributions remain below it. When the analysis assumes that all individuals contribute the same proportion of their earnings (5%), the likelihood of exceeding the ceiling increases with income. In addition, as the ceiling is set as a fixed nominal amount, the part of taxable contributions increases with the income level, thereby reducing the tax advantage on contributions and the overall tax advantage as income increases.
By contrast, when excess contributions are not allowed, or when individuals do not want to contribute above the ceiling, high-income earners actually get a larger overall tax advantage. When individuals refrain from making excess contributions because those contributions do not get tax relief, the introduction of the ceiling modifies the amount contributed into the plan. High-income earners are more likely to reach the ceiling and therefore to reduce their contributions as a proportion of their earnings. This would lead high-income earners to accumulate fewer pension assets, have lower pension benefits, and therefore pay less taxes (as compared to a situation without the ceiling). Lower pension benefits translate into a higher overall tax advantage for high-income earners because the proportion of their total pension income in the last tax bracket will be lower compared to a situation without the ceiling.
Figure 3.5. Overall tax advantage for an “EET” tax regime, with and without a ceiling on tax-deductible contributions, by income level
Note: The ceiling corresponds to 20% of the average earnings in the economy.
Impact of the type of post-retirement product
This sub-section considers five types of post-retirement product and explores how sensitive the overall tax advantage provided by the “EET” tax regime is to them. The types considered are: annuity certain with fixed nominal payments, annuity certain with inflation-indexed payments, life-long annuity with fixed nominal payments, programmed withdrawals, and single lump-sum payment.7 The tax advantage on contributions is not sensitive to the choice of the post-retirement product, but the other two components of the overall tax advantage may be affected by that choice.
Individuals withdrawing their savings all at once as a lump sum receive a lower overall tax advantage than individuals getting regular income during retirement (annuities and programmed withdrawals). As illustrated in Figure 3.6, the tax due on withdrawals under the “EET” tax regime is larger in the case of a lump-sum payment. When the whole amount of assets accumulated at retirement is taken as a lump sum, the individual’s total taxable pension income may move to a higher income tax bracket, implying higher taxes paid than when the assets are spread over retirement to get a regular income. As a consequence, the overall tax advantage is lower with the lump-sum option.
Programmed withdrawals provide a larger overall tax advantage than annuities. With programmed withdrawals, assets remain invested during the post-retirement phase. They keep accumulating tax free in the “EET” retirement plan, while returns continue to be taxed in the “TTE” traditional savings account. Therefore, the overall tax advantage is larger with programmed withdrawals than with annuities.
Figure 3.6. Overall tax advantage for an “EET” tax regime, according to the post-retirement product, average earner
Differences are smaller between different types of annuity product. The overall tax advantage is exactly the same when comparing an annuity certain with fixed nominal payments to an annuity certain with inflation-indexed payments. Although the payments in each year are different, the sum of the present value of payments over the post-retirement period is identical for both types of annuities. Individuals getting a life-long annuity receive a slightly lower overall tax advantage than individuals getting an annuity certain. The main difference between a life-long annuity and an annuity certain is that the number of payments is not known in advance for the life-long annuity.8 In the calculation of the annuity factor, the probability of still being alive at each age is taken into account. The consequence is that the payments are bigger with a life-long annuity than with an annuity certain because the annuity provider considers that there is a positive probability that the individual will die before reaching the average life expectancy of their cohort. When pension benefits are taxed, this translates into a higher tax due and a lower overall tax advantage.
Impact of financial and economic parameters
The overall tax advantage can also change when parameters such as returns, discount rates, inflation and productivity growth change. The baseline has inflation at 2%, productivity growth at 1.25%, and the real rate of return on investment and the real discount rate equal to 3%.
The overall tax advantage increases with inflation and real returns (see Figure 3.7). Higher inflation (from 2% to 3%) or higher real rates of return (from 3% to 4%) lead to higher nominal rates of return. Therefore, the tax advantage on returns provided by the “EET” tax regime, with respect to a “TTE” benchmark, is larger in a higher inflation and return scenario, because the tax paid on returns in the traditional savings account is higher (compound interest). A higher real return increases the level of assets accumulated at retirement, the level of pension benefits and thereby the tax due on them. However, the impact is not significant on the tax advantage on withdrawals.
Figure 3.7. Overall tax advantage for an “EET” tax regime, according to different economic parameters, average earner
Note: In the higher real return scenario, the discount rate is still equal to the rate of return.
The overall tax advantage provided by the “EET” tax regime declines when the discount rate is lower than the rate of return. A lower discount rate gives a higher weight to future flows. The overall tax advantage therefore declines because future tax payments on withdrawals count more in the present value calculation.
The impact of productivity growth on the overall tax advantage is minor because all the flows grow in similar proportions. An increase in productivity growth translates into higher contributions through higher wages. Productivity growth does not affect the tax advantage on contributions, however, because the indicator is expressed as a percentage of the present value of contributions (the numerator and denominator grow in the same proportion). In addition, an increase in productivity growth implies the same increase in the personal income tax brackets. Therefore, higher returns and higher future pension benefits driven by higher contributions may not translate into higher tax rates applied to these flows.
When income tax brackets only grow in line with inflation, instead of with wage growth, the impact on the overall tax advantage varies with the income level of the individual. When income tax brackets grow at a slower pace than wages, the individual’s wage may move to a higher income tax bracket over time, therefore increasing the marginal tax rate. This implies that the rate at which tax relief is provided may increase during the career, thereby increasing the tax advantages on contributions and on returns. This is only possible for individuals whose entry income does not already fall in the last income tax bracket and when that entry income is close enough to the next tax bracket to move into it before reaching the age of retirement. In the same way, total taxable pension income may move into a higher tax bracket when tax brackets grow only in line with inflation. This would imply higher taxes paid on withdrawals and a more negative tax advantage on withdrawals. Whether the overall tax advantage increases or decreases following the lower indexation of tax brackets will therefore depend on the position of the individual’s entry income in the different tax brackets.
Summary of the main findings
The calculation of the overall tax advantage provided by the “EET” tax regime and the sensitivity analysis allows for a better understanding of the mechanisms through which individuals may benefit from a tax advantage when contributing to incentivised pension plans rather than to traditional savings vehicles. The main findings are:
Most individuals can expect to pay less in taxes when contributing to an “EET” private pension plan rather than to a “TTE” traditional savings account. The positive overall tax advantage derives from a preferential tax treatment for private pension contributions and returns on investment that is not fully offset by the taxation of benefits. However, individuals not paying taxes do not receive any tax advantage.
The overall tax advantage increases with income through higher marginal tax rates, but the rate of increase slows as the marginal tax rate increases. When retirement income is taxed at a lower rate than income from work, the tax paid on withdrawals may not compensate fully for the initial tax relief on contributions and the overall tax advantage is larger than when the tax rate remains constant over the lifetime, benefitting in particular middle to upper-middle income earners.
The overall tax advantage increases with the length of the contribution period because of compound interest.
A higher contribution rate translates into a lower overall tax advantage because it leads to higher pension benefits that are taxed at a higher rate.
When excess contributions are allowed, introducing a tax-deductibility ceiling reduces the overall tax advantage for high-income earners, as they are more likely to contribute beyond the ceiling. To avoid a reduced overall tax advantage, high-income earners need to lower their contribution level.
Lump sums provide a lower overall tax advantage than post-retirement products offering regular payments because they may move the individual’s total taxable pension income into a higher income tax bracket.
Programmed withdrawals provide a larger overall tax advantage than annuities because assets remain invested during the post-retirement phase and continue to be tax exempt in the retirement vehicle, while they are taxed in the traditional savings account.
A higher nominal rate of return translates into a larger overall tax advantage. This remains true when higher nominal returns are just the result of higher inflation.
A lower discount rate translates into a lower overall tax advantage because any future differences have a bigger weight in present value calculations.
3.2. Does the design of financial incentives in different countries provide a tax advantage when people save for retirement?
This section sets out the overall tax advantage in 42 OECD and selected non-OECD countries based on tax rules in place in 2018. The overall tax advantage is the amount of tax saved by an individual when contributing to different types of private pension plan instead of to a benchmark savings vehicle. It is calculated for all types of private pension plan that exist in the analysed countries, as long as the financial incentive is designed differently.
The methodology is the same as that described in Section 3.1, but in addition:
The analysis considers all mandatory and voluntary plans, occupational and personal plans, defined benefit (DB) and defined contribution (DC) plans.
All the country-specific parameters that apply for each type of plan are taken into account (e.g. tax treatment, tax-deductibility limits, ceiling on the lifetime value of pension assets, non-tax financial incentives).
The personal income tax system (i.e. the tax brackets and the marginal tax rates) is also country-specific.
The private pension plans are compared to several benchmark savings vehicles: a traditional savings account, a mutual fund (or collective investment scheme) and any other country-specific popular savings vehicles (e.g. life insurance contracts, special savings accounts). The analysis accounts for the country-specific tax treatment that applies to each benchmark savings vehicle.
Minimum and mandatory contribution rates fixed by regulation are applied whenever they exist. For voluntary plans, the analysis assumes a 5% contribution rate.
The age of retirement assumed in the analysis is the official age of retirement in each country.
The section first presents the results when the benchmark savings vehicle is a traditional savings account. It then looks at the impact of changing the benchmark.
Average earners in all analysed countries enjoy a tax advantage when saving for retirement in a private pension plan rather than in a traditional savings account. This is because the preferential tax treatment that contributions and returns on investment usually enjoy in a private pension plan (as compared to a traditional savings account) outweighs the potential taxation of benefits. Table 3.2 provides the overall tax advantage received by an average earner, broken down by components (tax advantage on contributions, tax advantage on returns and tax advantage on withdrawals), for all OECD countries and selected non-OECD countries, and according to different types of private pension plan. It shows that the overall tax advantage is positive for all types of plan except in Denmark and Colombia.9 The amount of tax saved varies from 8% of the present value of all contributions in Sweden, to around 50% in Israel, Lithuania, the Netherlands and Mexico. Countries with the largest private pension markets, such as Australia, Canada, Denmark, Switzerland, the United Kingdom and the United States, provide overall tax advantages between 20% and 40% of the present value of contributions, with the United States at the higher end of the range and Australia, Denmark, and the United Kingdom at the lower end.10
Table 3.2. Overall tax advantage in OECD and selected non-OECD countries by component and type of plan, average earner
Present value of taxes saved over a lifetime, as a percentage of the present value of contributions
Note: “E” stands for exempt, “T” for fully taxed and “t” for partially taxed.
The differences observed across countries are due not only to the characteristics of the tax regimes applied to pension plans and savings vehicles, but also to the characteristics of the personal income tax system in each country (i.e. the tax brackets and the tax rates). In Canada and Greece for example, the overall tax advantage of contributing to a private pension plan is different (25% and 12% of the present value of contributions respectively), even though the same tax regime applies to retirement savings (contributions and returns are tax exempt and withdrawals are taxed, “EET”). However, an average earner in Canada has a marginal tax rate of about 30%, while an average earner in Greece has a 22% marginal tax rate.11 A lower marginal income tax rate results in a lower value of the tax relief.
The overall tax advantage provided to individuals is sensitive to the assumptions used, especially the assumed contribution rate. In voluntary pension systems, people contribute at different rates. Therefore, to compare the overall tax advantage across countries there is a need to assume a single rate of contribution for voluntary components of the pension system.12 Figure 3.8 shows the impact of increasing the assumed contribution rate from 5% to 10% for voluntary private pension systems. Everything else equal, a higher contribution rate translates into higher assets accumulated at retirement and higher pension benefits. In systems where pension benefits are taxed, these higher benefits may be taxed at a higher rate, because they may push total taxable pension income into a higher tax bracket or because the share of total taxable pension income in the last tax bracket is bigger. This would lead to a reduction in the overall tax advantage. In Ireland, the United States and Malta, the overall tax advantage falls by 10, 11 and 5 percentage point respectively when increasing the contribution rate to 10%. In the other countries with voluntary pension systems, the change in the overall tax advantage provided to the average earner is not significant. The relative value of the tax incentive across countries is therefore significantly affected by the assumed rate of contribution.
Figure 3.8. Overall tax advantage provided by voluntary pension systems according to the assumed contribution rate, average earner
Note: Calculations for countries with voluntary private pension systems only, assuming a contribution rate of 5% or 10%.
In many OECD countries, the overall tax advantage varies according to the type of plan to which individuals contribute. Indeed, many countries apply different tax treatments to different types of plan. For example, in Belgium, individuals can choose from three different vehicles for their voluntary personal pension contributions. However, because the tax treatment of these voluntary contributions varies according to the vehicle, the overall tax advantage changes from 10% of the present value of contributions for long-term savings individual life insurance products to 16% for ordinary pension savings accounts.
When employee and employer contributions to occupational pension plans receive a different tax treatment, the overall tax advantage depends on the relative importance of each type of contribution in the total. For instance, in Croatia, employer contributions are not considered as taxable income for individuals, while employees’ contributions are made out of taxed earnings. As the analysis assumes that employer contributions represent half of the total contributions in closed pension funds and 0% in open pension funds, the tax advantage on contributions is larger for closed funds because half of the contributions is tax exempt.
Introducing non-tax financial incentives, such as fixed nominal subsidies or matching contributions, increases the overall tax advantage. For example, in New Zealand, the same tax regime applies to occupational pension plans and to “KiwiSaver” plans (contributions and returns on investment are taxed, but at a lower rate than for a traditional savings account, and withdrawals are tax-free). Adding the government matching contribution for KiwiSaver plans boosts the overall tax advantage from 0% to 10% of the present value of contributions.
In some countries, the overall tax advantage is larger for mandatory pension savings than for voluntary pension savings. This is the case in Australia, where the amount of taxes saved by the average earner represents 25% of the present value of contributions when making mandatory contributions, but only 11% when making voluntary contributions. This trend is also found in Iceland (30% for occupational plans as opposed to 4% for personal plans), Mexico (51% for mandatory contributions as opposed to 39% for long-term voluntary contributions), Norway (29% for occupational DC plans as opposed to 18% for personal plans), the Slovak Republic (36% for pillar 2 plans as opposed to 12% for pillar 3 plans), Croatia (40% for mandatory contributions as opposed to 31% for closed pension funds) and Romania (19% for the mandatory scheme as opposed to 17% for the voluntary scheme).
By contrast, some other countries encourage more voluntary savings. This is the case in Chile (the amount of tax saved represents 21% of the present value of contributions for “type A” voluntary contributions as opposed to 12% for mandatory contributions), Estonia (37% for voluntary contributions as opposed to 26% for mandatory contributions), Latvia (26% for the voluntary scheme as opposed to 20% for the mandatory scheme), and Switzerland (31% for personal plans as opposed to 26% for mandatory occupational plans).
The value of the overall tax advantage varies with the income level of the individual (Figure 3.9). Only countries with fixed personal income tax rates treating all retirement savings equally, independently of the income level, offer the same overall tax advantage across the income scale, as for instance in Bulgaria. In the other countries, the variation of the overall tax advantage with income is the result of the different tax regimes, the plan-specific limits on the amount of contributions attracting tax relief and the characteristics of the personal income tax system in each country. In 18 of the 42 countries analysed, high-income earners (earning four times average earnings) benefit from a higher overall tax advantage than average earners and low-income earners (earning 60% of average earnings). This is the case for example in Canada, Chile, Denmark, Italy, Japan, Poland, Switzerland and the United Kingdom (black triangles are on top).
Low-income earners receive higher financial incentives in 15 of the countries analysed (white diamonds are on top). These include countries offering fixed nominal subsidies (e.g. Lithuania, Turkey) or matching contributions with a low maximum entitlement (e.g. New Zealand). This type of incentive is found to be more valuable to low-income earners as the government payment represents a larger share of their income. This group also includes countries applying the “EET” tax regime to retirement savings but where low-income earners actually receive a total pension income lower than the threshold above which income becomes taxable, basically benefitting from an “EEE” tax regime (e.g. Ireland, Norway).
Finally, seven countries provide the largest tax advantage to average earners, like France, Iceland, the Netherlands and Slovenia (blue bars are higher than the other symbols).
Figure 3.9. Overall tax advantage provided to individuals, by income level
Note: Calculations based on the 2018 tax treatment of the main pension plan in each country.
Figure 3.10 shows that the choice of the benchmark savings vehicle is also important. Out of the 42 countries analysed, in 27 countries, the overall tax advantage that individuals receive when contributing to a private pension plan changes when the benchmark changes. In most cases, the overall tax advantage is lower when the benchmark is a mutual fund rather than a traditional savings account. This stems from the fact that some forms of investment income attract a more favourable tax treatment in a mutual fund than in a traditional savings account, thus lowering the tax advantage on returns derived from the non-taxation or lower taxation of returns in private pension plans. For example, in Canada, returns on investment are taxed at the individual’s marginal rate of income tax in traditional savings accounts. For mutual funds, only 50% of capital gains from shares and bonds are included in income for taxation purposes. By contrast, the overall tax advantage is larger in the case of a mutual fund benchmark in Belgium, Korea, Luxembourg, Slovenia, Turkey, Colombia and Malta. Again, the taxation of returns on investment is the cause for the change.
Finally, in some countries, there exists other commonly used savings vehicles with attractive tax treatments that may lower the overall tax advantage of saving for retirement in private pension plans. This is the case in Canada with Tax-Free Savings Accounts (TFSAs), in France with life insurance contracts, in Spain with long-term savings plans, in Switzerland with pillar 3b plans, in Turkey with life insurance contracts and in the United Kingdom with Lifetime Individual Savings Accounts (LISAs). In these countries, the overall tax advantage when saving in a private pension plan is lower when choosing those special savings accounts as comparators. In Canada, Spain and the United Kingdom, a “TEE” tax regime applies to TFSAs, long-term savings plans and LISAs respectively. Contributing to a private pension plan as compared to one of those savings vehicles therefore does not bring any tax advantage on returns on investment. In the case of Switzerland, an “EET” tax regime applies to pillar 3b plans, just as for private pension plans, the tax relief on contributions is however more limited for pillar 3b plans. Regarding life insurance contracts, a “Ttt” tax regime applies in France and a “ttE” tax regime applies in Turkey.
Figure 3.10. Overall tax advantage in selected OECD countries by type of benchmark savings vehicle, average earner
3.3. Conclusions
This chapter has assessed whether the design of financial incentives in different countries provides an advantage when people save for retirement. The analysis has calculated the overall tax advantage resulting from the design of financial incentives for different types of pension plan as compared to a benchmark savings vehicle. This indicator represents the amount saved in taxes paid by an individual over their lifetime when contributing the same pre-tax amount to a private pension plan instead of to a benchmark savings vehicle. It includes the effect of non-tax financial incentives, such as fixed nominal subsidies and matching contributions, which are treated as tax credits paid into the pension account of eligible individuals.
In most OECD countries, the design of financial incentives provides a tax advantage when people save for retirement instead of saving in other traditional savings vehicles. The value of the overall tax advantage, however, varies and depends on the tax regime applied to pension plans and savings vehicles, as well as on the characteristics of the personal income tax system (i.e. the tax brackets and the tax rates), the income level, the amount saved, the length of the contribution period, the type of post-retirement product, the benchmark savings vehicle chosen as a comparator and other financial and economic parameters.
The amount of taxes saved by an average earner when contributing to a private pension plan rather than to a traditional savings account varies greatly across countries. Usually, the positive overall tax advantage derives from a preferential tax treatment for private pension contributions and returns on investment which is not offset by the potential taxation of benefits.
While many countries offer the largest overall tax advantage to high-income earners, there are ways to target tax advantages at low-income earners. Fixed nominal subsidies for example significantly increase the overall tax advantage for low-income earners, as the value of the subsidy is higher for them in relative terms.
Tax advantages can encourage people to save for longer periods, but not necessarily to save more in private pension plans. Indeed, individuals contributing longer can expect a larger overall tax advantage under tax treatments that exempt returns on investment. This is due to the effect of compound interest. The longer the contribution period, the longer the investment income can accumulate tax free and the larger the tax advantage on returns on investment is. On the other hand, higher contribution rates may translate into lower tax advantages because they lead to higher pension benefits that are taxed at a higher rate. Moreover, introducing ceilings on tax-deductible contributions may reduce the contribution level of high-income earners.
Straightforward and simple tax rules applying to the private pension system as a whole may increase people’s trust and help to increase participation in and contributions to private pension plans. In a majority of countries, different tax regimes apply to different types of pension plan and savings vehicle at the national level. In addition, the progressivity of income tax systems and the limits that apply to certain forms of tax relief modify the tax advantage by income level. This may create confusion for people who may not have the ability to understand the differences, assess the different options and choose the best one for them.
References
[3] Brady, P. (2012), The Tax Benefits and Revenue Costs of Tax Deferral (September).
[1] Mirrlees, J. et al. (2011), Tax by design, Oxford University Press.
[2] OECD (2017), Pensions at a Glance 2017: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/pension_glance-2017-en.
[4] OECD (2016), OECD Pensions Outlook 2016, OECD Publishing, Paris, http://dx.doi.org/10.1787/pens_outlook-2016-en.
Annex 3.A. Framework and assumptions
This annex describes the framework and assumptions used to calculate the overall tax advantage provided to individuals saving in a funded private pension plan in different countries. The approach used consists in comparing the tax treatment of a retirement savings plan to that of a benchmark savings vehicle, i.e. comparing how contributions, returns on investment and withdrawals are taxed in each savings vehicle. This includes the effect of government non-tax incentives, such as fixed nominal subsidies and matching contributions, which are considered as refundable tax credits paid into the pension accounts of entitled individuals.
Definition of the indicator
The overall tax advantage is defined as the difference in the present value of tax paid on contributions, returns on investment and withdrawals between a benchmark savings vehicle and a private pension plan. It represents the amount saved in taxes paid by an individual over their working and retirement years when contributing to a private pension plan instead of to a benchmark savings vehicle. This indicator is calculated for a flow of contributions made yearly over the career between an initial age, e.g. 20, and the age at which the individual retires, e.g. 65, given a constant contribution rate. It is expressed as a percentage of the present value of contributions.
The overall tax advantage allows assessing the tax advantage over the entire career of an individual by summing-up the effects of the tax treatment of private pension plans induced by a yearly flow of contributions. In addition, it can be calculated for all types of pension plan, including DB plans, and can appropriately account for caps or limits on the amount of contributions attracting tax relief and ceilings on the lifetime value of pension assets, when relevant.
The indicator is calculated for individuals on different levels of income. The level of income is expressed as a multiple of the annual average wage, from 0.2 to 16 times. The annual average wage is taken from the OECD Average annual wages database for each country. During the contribution period, wages are assumed to grow in line with inflation and productivity. The analysis assumes constant values for inflation, the growth rate of productivity, the real rate of return on assets and the real discount rate for the entire simulation (Annex Table 3.A.1).
Annex Table 3.A.1. Baseline values of parameters
Benchmark savings vehicles
Each type of private pension plan in a given country is compared against different benchmark savings vehicles. The analysis considers at least two benchmark savings vehicles for each country: a traditional savings account and a mutual fund (or collective investment scheme). When other savings vehicles are commonly used in a given country (e.g. special savings accounts, life insurance contracts), they are also considered.
For comparability purposes, the portfolio of the benchmark savings vehicle is assumed to be the same as the one for the private pension plan. Funds are assumed to be invested in only two asset classes: fixed income and shares. Other asset classes, such as real estate or cash and deposits, are not considered.
In addition, the same post-retirement product as for the private pension plan is also assumed for the benchmark. All post-retirement products available in a country are considered. These are usually lump sum payments, life annuities (inflation-indexed or not) and programmed withdrawals.13 Payments from annuities and programmed withdrawals are calculated according to the life expectancy at retirement given by the most recent life tables for both sexes in the Human Mortality Database (the expected age of death is therefore assumed to be fixed).14
Personal income tax system
The analysis uses the tax schedule and tax brackets in place in each country in 2018 to calculate income tax and derive marginal tax rates. Both national (respectively federal) and local (respectively state) personal income tax systems are taken into account. Personal allowances and tax credits are also taken into account when they are available to all taxpayers. The income limits for all tax brackets, the allowances and the credit amounts are assumed to be indexed to wage growth going forward, unless country-specific rules indicate otherwise.15
The calculation of contributions and their taxation
The analysis assumes the same amount of pre-tax contributions for both the private pension plan and the benchmark savings vehicle. The amount of money saved in a private pension plan can comprise employee, employer and government contributions, while the amount saved in a benchmark savings vehicle generally only comprises individual contributions. Assuming different levels of contributions to both plans would prevent distinguishing between the impact of different contribution levels and the impact of the tax treatment of private pension plans on the overall tax advantage. The analysis therefore assumes that the individual pays the full equivalent total employee and employer contribution in the benchmark savings vehicle.16
Government contributions only accumulate in the relevant plan for eligible individuals. Government matching contributions and subsidies are increasingly common ways to promote savings for retirement in private pension plans. These amounts are deposited in the pension account of eligible individuals. As this type of contribution is not part of the wage bill, there is no reason to count them as well for the benchmark savings vehicle. In addition, the analysis considers government contributions as a negative tax on contributions to private pension plans, which allows identifying their impact on the overall tax advantage.
Funded private pension plans based on accumulated rights (occupational DB plans)
Contribution rates in occupational DB pension plans at the national level are not easily available. In a DB plan pension, benefits are defined according to a formula based on an accrual rate, the salary and the length of employment. The level of benefits obtained for a given contribution is not known. However, the analysis calculates the contribution rate that would be needed in a plan based on assets accumulated (e.g. DC plans) to reach the same level of benefits than the DB pension plan. To that end, the analysis proceeds with the following steps:
1. Calculate the pension income received from a DB plan according to the country-specific formula;17
2. Calculate the equivalent amount of assets accumulated at retirement to get this annual payment by reversing the annuity formula;
3. Calculate the after-tax contribution rate needed to provide the same amount of assets at retirement with a plan based on assets accumulated (e.g. DC plan) by dividing the amount of assets calculated under step 2 by the amount of assets that would have been accumulated in a plan based on assets accumulated had the whole salary been invested over the career;
4. Taking into account the tax treatment of contributions for the DB pension plan, calculate back the tax due on contributions to the DB pension plan and the pre-tax contribution rate;
5. Use this pre-tax contribution rate for the benchmark savings vehicle. The benchmark savings vehicle and the private pension plan therefore receive the same pre-tax contribution.18
Even though actual contributions made to the DB pension plan are not known for certain (because there is no direct link in DB plans between contributions and benefits), step 4 uses the contribution rate calculated under step 3 to estimate how much may have been contributed to the DB plan and to approximate the tax due on these contributions, when relevant.
Funded private pension plans based on assets accumulated (DC, hybrid and personal plans)
The analysis assumes a constant contribution rate during the career for occupational DC plans, personal pension plans and occupational hybrid DB plans (in which benefits depend on a rate of return credited to contributions). A 5% contribution rate is assumed, except for private pension plans in which mandatory contribution rates or minimum contributions rates apply.19 Caps on contributions are applied when relevant.
Taxation of contributions
The analysis applies the specific tax treatment in place in each country for contributions to the private pension plan and the benchmark savings vehicle, respectively. When contributions are made from income that has already been taxed, as is usually the case for savings vehicles, the analysis multiplies the pre-tax contribution by the appropriate tax rate to calculate the tax already paid. The appropriate tax rate can be the individual’s marginal rate of income tax (which varies depending on the level of income) or any fixed tax rate defined by regulation. When contributions are tax exempt up to a limit (expressed either as a percentage of the salary or as an absolute amount), the analysis assumes that the individual does not make excess contributions.20
Tax credits, matching contributions and fixed nominal subsidies are considered as a negative tax on contributions. Tax credits and matching contributions are calculated as a proportion of after-tax contributions.
The taxation of returns on investment
The amount of assets accumulated at the end of each year is the sum of the amount of assets accumulated at the beginning of that year, the new after-tax contributions and the investment income earned. This amount is reduced by the tax due on returns on investment when these are taxed.
The tax treatment of returns on investment may depend on the portfolio composition. The analysis assumes a portfolio composed of 60% government bonds and 40% equities. When capital gains and dividends attract a different tax treatment, the analysis assumes that investment income derives one-third from dividends and two-thirds from capital gains. The analysis assumes a holding period of securities of 6.7 years when this criteria matters for the tax treatment of investment income.21
The calculation of withdrawals and their taxation
For DB plans, only life annuities are considered, as such plans usually promise a regular payment for life. The life annuity payment is calculated according to the country-specific formula when available. Otherwise, expected benefits from the DB pension plan are calculated as the product between the career length, a 1.5% accrual rate and the final salary.
For DC plans, personal plans and savings vehicles, the analysis calculates the annuity payment by transforming the estimated assets accumulated at retirement into a stream of annual payments. It calculates the benefit payment of an annuity certain priced using the annuity formula, based on the life expectancy at the age of retirement and a constant discount rate. The annuity payments can either be fixed in nominal terms or inflation-indexed.22
In the case of programmed withdrawals, the expected age of death is assumed to be fixed and is defined by adding the remaining life expectancy at retirement to the age of retirement. The rate of return on investment remains constant, at the same level as during the accumulation phase. The same tax treatment as the one applied during the accumulation phase is assumed to continue applying during the post-retirement phase, unless country-specific rules indicate otherwise.
After-tax withdrawals are calculated as before-tax withdrawals minus the tax due on withdrawals, calculated by applying the appropriate tax rate. The analysis takes into account the impact of public provision when calculating the tax due on withdrawals. This means that it accounts for the fact that retired individuals may also receive a taxable public pension. To that end, the analysis first estimates the level of the public pension that the individual may receive, according to the level of income while working. The OECD pension models provide the gross replacement rates from mandatory public pension schemes, taking into account potential coverage by private schemes (cf. Table 4.5 in the OECD Pensions at a Glance 2017 for three income levels). The analysis applies the different replacement rates to final earnings depending on the individual’s level of income. Public pension payments are indexed according to country-specific rules. The derived public pension income is added to withdrawals from the private pension plan and from the benchmark savings vehicle. The total taxable income is then run through the personal income tax brackets to determine the tax due on that income.
The taxation of funds accumulated
Some countries also tax the total amount of funds accumulated in private pension plans. This tax can take several forms. In some countries (e.g. Belgium), funds accumulated (returns on investment and past contributions) are taxed at a given age. In some other countries (e.g. the United Kingdom), the total amount of funds accumulated at retirement is taxed upon withdrawal when it exceeds a certain limit. In all cases, the analysis adds this tax to any tax due on withdrawals.
Notes
← 1. Contributions to private pension plans and savings vehicles, as well as benefits paid by these plans, can be subject to social contributions. These social contributions are usually levied on gross income to finance, among others, health care insurance, unemployment insurance, public pensions and disability pensions. They are not taken into account for the calculation of the overall tax advantage.
← 2. Annex 3.A provides the full description of the framework and assumptions to calculate the overall tax advantage.
← 3. This implies that the individual’s wage remains in the same income tax bracket over time.
← 4. Annuity payments are calculated according to the life expectancy at retirement given by the 2015 French life table for both sexes from the Human Mortality Database.
← 5. With an annuity certain, individuals receive a fixed number of payments, determined according to a fixed and equal for all life expectancy defined at the age of retirement. This is different from a life-long annuity, with which individuals receive payments until death.
← 6. The analysis assumes that personal income can fall into five different tax brackets with tax rates of 0%, 14%, 30%, 41% and 45% respectively. This structure is inspired from the French tax system.
← 7. With an annuity certain, individuals receive a fixed number of payments, defined according to life expectancy at the age of retirement. This is different from a life-long annuity, with which individuals receive payments until death. With programmed withdrawals, assets remain invested during retirement and the analysis assumes that individuals receive a fixed number of payments, defined according to life expectancy at the age of retirement.
← 8. The analysis however still considers a fixed time horizon for the calculations, corresponding to the remaining life expectancy at the age of retirement.
← 9. In Denmark, the negative overall tax advantage for age savings plans is due to the means-testing rules of public pensions. Assets in savings vehicles are usually included in the asset test, except for age savings plans. The individual therefore receives a larger taxable public pension in the case of the age savings plan, and pays more taxes on total taxable income. In Colombia, the average formal worker does not pay personal income tax. There is therefore no tax advantage when contributing to a private pension plan rather than to a traditional savings account.
← 10. Numbers are not directly comparable to those published in Chapter 2 of the OECD Pensions Outlook 2016. Beyond updating the tax rules from 2015 to 2018, several assumptions have been changed. In particular, the assumed contribution rate for voluntary pension schemes has been reduced from 10% to 5% because in some countries, a 10% voluntary contribution rate over a full career is likely to be rare and produces quite large pension benefits. Everything else equal, this reduced contribution rate may increase the overall tax advantage provided by “EET” tax regimes because lower contributions translate into lower assets accumulated at retirement and lower pension benefits, which in turn may fall into a lower tax bracket.
← 11. In Canada, tax rates vary according to the province or territory. The calculations assume that the individual lives in Ontario.
← 12. The calculations assume a common contribution rate across countries with voluntary funded pension systems to be able to compare. This means that the assumed contribution rate does not always represent the actual average contribution rate observed in some countries.
← 13. The model does not consider lump sum payments and programmed withdrawals for DB pension plans.
← 14. More information on the Human Mortality Database can be found at www.mortality.org/.
← 15. In Chapter 2 of the OECD Pensions Outlook 2016, the analysis assumes that tax brackets, allowances and credit amounts are indexed to inflation.
← 16. In addition, the lowest cap on contribution (if any) applies to both plans.
← 17. When the formula is not available, expected benefits from the DB pension plan are calculated as the product between the career length, a 1.5% accrual rate and the final salary.
← 18. The resulting benefit at retirement may however differ as the tax treatment of the benchmark savings vehicle most likely varies from the one of the DB pension plan.
← 19. In Chapter 2 of the OECD Pensions Outlook 2016, the analysis assumes a 10% contribution rate for voluntary pension plans.
← 20. In Chapter 2 of the OECD Pensions Outlook 2016, the analysis assumes that all individuals contribute at the same fixed rate and may therefore contribute beyond tax-deductibility limits.
← 21. This is equivalent to assuming that 15% of the securities held in the portfolio are sold every year. Admittedly, this is based exclusively on US observations for shares. See Burman, L. and P. Ricoy (1997), “Capital gains and the people who realize them”, National Tax Journal Vol. 50, No. 3.
← 22. The annuity formula is given by where P is the periodic payment, indexation is equal to 0 in the case of fixed nominal payments and is equal to inflation in the case of inflation-indexed payments, dr is the discount rate and LE is the life expectancy at retirement.