The Taxation of Pensions: A Shelter Can Become a Trap

63 Pages Posted: 11 Jun 2000 Last revised: 29 Mar 2008

See all articles by John B. Shoven

John B. Shoven

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

David A. Wise

National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: November 1996

Abstract

Pensions are widely thought to be attractive tax shelters which encourage saving for retirement. They allow people to save before-tax dollars and to compound investment returns without current taxation. However, the taxation of pension assets as they are distributed in retirement or as they pass through an estate may turn the shelter into a trap, at least for large pension accumulations. Pension distributions can face marginal tax rates as high as 61.5 percent; pension assets passing through an estate can face virtually confiscatory marginal tax rates between 92 and 99 percent. The analysis of this paper shows the circumstances under which these extraordinarily high marginal tax rates will be encountered. They are not limited to the rich. In fact, people of modest incomes who participate in a pension plan over a long career may face such rates. The paper presents a comprehensive examination of the taxation of pensions and discusses the optimal responses of households to the incentives created by the tax system.

Suggested Citation

Shoven, John B. and Wise, David A., The Taxation of Pensions: A Shelter Can Become a Trap (November 1996). NBER Working Paper No. w5815. Available at SSRN: https://ssrn.com/abstract=225603

John B. Shoven (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
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National Bureau of Economic Research (NBER)

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David A. Wise

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS)

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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