Publication: Taxation : The Tax Treatment of Funded Pensions

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Whitehouse, Edward
The tax treatment of funded pensions is a critical policy choice in pension reform. In countries with mature funded systems, like the Netherlands, Switzerland, the United Kingdom and the United States, pension funds are worth 85 per cent of GDP on average. Pension funds in mature systems are large and could prove an attractive revenue target. They are a major force in private savings flows, supplying capital to industry and providing retirement incomes. The note continues with an in depth analysis of taxing pensions, and further, highlights the question, how generous a tax treatment? There are three arguments for taxing pensions more generously that other kinds of savings. a) to ensure people have a standard of living in retirement close to when they were working, b) to cut the cost of social security benefits for pensioners, and to increase long-term savings. The note concludes that : the 'expenditure tax' taxes pension savings once, either when contributions are made or benefits withdrawn it is the best way of taxing pensions, because it is neutral between consuming now and consuming in the future; most countries treat pensions close to the expenditure tax, the pre-paid tax, which exempts benefits, collects more revenue now, but may not be credible.
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Whitehouse, Edward. 2005. Taxation : The Tax Treatment of Funded Pensions. World Bank Pension Reform Primer Series. © World Bank, Washington, DC. License: CC BY 3.0 IGO.
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