How Should Pensions Be Taxed? Theoretical Considerations and the Scandinavian Experience

29 Pages Posted: 22 Jan 2016

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: December 17, 2015

Abstract

How should pensions be taxed? In many cases pension savings are usually taxed more leniently than other forms of savings. What is the rationale for this? And are those concerns best targeted via taxation or mandatory pension savings? These issues are discussed with outset in the experience of the Scandinavian countries (Denmark and Sweden). These countries are also interesting because they have implemented a dual income taxation scheme; i.e. they pursue an ETT-taxation regime vis a vis pensions. It is argued that the incentive structure related to pension savings and retirement can not be seen independently from how private pensions (and savings more generally) affect public pensions via means-testing. The effective rates of taxation may thus differ significantly from the nominal rates. For Denmark and Sweden it is shown that the effective tax rates on pension savings can be rather high, and for low/medium income close to 100%.

Keywords: pensions, taxation, means-testing, distribution, effective tax rates

JEL Classification: H200

Suggested Citation

Andersen, Torben M., How Should Pensions Be Taxed? Theoretical Considerations and the Scandinavian Experience (December 17, 2015). CESifo Working Paper Series No. 5660. Available at SSRN: https://ssrn.com/abstract=2719518

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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DK-8000 Aarhus C
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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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