Changes in the taxation of private pensions- Macro

JournalofPolicyModeling30(2008)693–712Availableonlineat∗aUniversityofMelbourne,AustraliabGriffithUniversity,AustraliaReceived1December2007;receivedinrevisedform4February2008;accepted21February2008Availableonline8March2008AbstractThispaperprovidesanappliedgeneralequilibriumanalysisofseveralalternativetaxationregimesapplyingtoprivatepensions.Theanalysisfocusesontheimplicationsofthisandotherpensiontaxregimesforintergenerationalequity,nationallivingstandards,laboursupply,savingandsocialwelfare.ThemethodofanalysisissimulationofanopeneconomyoverlappinggenerationsCGEmodel.ThemodeliscalibratedtoAustraliaandisusedtoexaminethedecision,announcedbytheAustralianGovernmentinits2006Budget,toexemptfromtaxallsuperannuation(theAustraliantermforsuperannuation)benefitsreceivedbyrecipientsover60yearsofage.©2008SocietyforPolicyModeling.PublishedbyElsevierInc.Allrightsreserved.JELclassification:H31;H32;J18;E21Keywords:Privatepensions;Superannuation;Taxation;Intergenerationalequity;Socialwelfare1.IntroductionPrivatepensiontaxstructurescanbebroadlydescribedintermsofthetreatmentduringthreeseparatestages.Theseconcernthecontributionstoapensionfundfrompre-taxincome,theearningsobtainedbythefundandtheincomewithdrawnfromthefundafterretirement.Theaiminthispaperistoexamineunanticipatedshiftsfromastructureinwhichtaxisimposedateachstagetoalternativestructures,usinganoverlappinggenerationsgeneralequilibriummodel.∗Correspondingauthor.Tel.:[phone];fax:[phone].E-mailaddress:r.guest@griffith.edu.au(R.Guest).0161-8938/$–seefrontmatter©2008SocietyforPolicyModeling.PublishedbyElsevierInc.Allrightsreserved.doi:10.1016/j.jpolmod.2008.02.003694J.Creedy,R.Guest/JournalofPolicyModeling30(2008)693–712Themodelpresentedbelowisquitegeneralinformandcanbeappliedtoavarietyofcountries.However,thispaperismotivatedbythechangestothetaxationofsuperannuationannouncedinthe2006AustralianGovernmentBudget.SuperannuationistheAustraliantermforprivatepensionsandinthispaperthetwotermsareusedsynonymously.Oneimportantchangewasthedecisiontoexemptfromtaxallsuperannuationbenefitsfromtaxedfunds,whethertakenintheformofalumpsumorannuity,forallpeopleover60yearsofageandtoapplyfrom1July2007.AustraliawaspreviouslytheonlyOECDcountrytotaxsuperannuationatallthreestages(seeHorne,2002).Thispolicychangewasunanticipatedandthereforehasthepotentialtosignificantlyaffectsavingplans,especiallyformiddle-agedworkers,withresultingimplicationsforintergenerationalequity.Therearealsopotentialgeneralequilibriumeffects.Changesintaxratescanaffecttherelativepriceofleisureandpresentconsumptionrelativetofutureconsumption,therebyaffectinglaboursupplyandsaving.Thebudgetaryimplicationsforthegovernmentmaybenon-trivialgivenpopulationageingbecausethegovernmenthascutoffarevenuestreamthatwouldotherwisehavegrownwiththeincreasingproportionofhouseholdswhoareself-fundedretirees.Thisislikelytobeabiggerissueifsuperannuationcontributionratesincreaseinresponsetothenewtaxincentives.1Importantly,thegovernmentfacesabudgetconstraint,whichimpliesthatothertaxesmustultimatelyrise,orspendingmustfall,inresponsetosuperannuationtaxconcessions.Theseadjustmentscauseoffsettingeffectsonlaboursupply,savingandequity.Itcanbeshownthatundercertainassumptionsthevarioustaxregimesareequivalentinthesensethatashiftfromonewhichtaxesallstages(contributions,fundearningsandbenefits),tooneinwhichbenefitsareexempt,wouldhavenoeffectonlifetimesuperannuationbalancesandthereforenobehaviouraleffectsforoptimisingagents.SeeAppendixAand,foracontinuoustimeexposition,KingstonandPiggott(1993).However,acriticalassumptionunderlyingthisequivalenceisneutralitywithrespecttosuperannuationrevenue(inpresentvalueterms)whichisunlikelytoapplyandcouldnotbeassumedbyhouseholdstoapply.This,andthefactthattaxpolicychangesarealmostalwaysunanticipatedbyhouseholds,meansthatsuchchangeshavethepotentialtoaffectsavingplanswithresultingimplicationsforintergenerationalequity,macroeconomicvariablesandeconomicwelfare.Theinitialeffectsarelikelytobestrongerthanthelongruneffectsbecausetheunanticipatednatureofthepolicycausesrelativelylargeadjustmentsimmediatelyfollowingtheshockasmiddle-agedhouseholds,inparticular,adjusttheirbehaviouroverashorttimeframe.Cerda(2007)alsoconsidersthemacroeconomicimplicationsandintergenerationalimplica-tionsofpensionreformapplyingtoaparticularcountry:Chile.Butinthatstudythepensionreformisamovefrompublicpensionstoprivatepensionaccounts.Thispaperisconcernedwithachangeintaxregimeapplyingtoprivatepensionsonly.Thesimulationshereignorethemanycomplexitiesoftheregulationsgoverningthetaxationofsuperannuationwhichtakeintoaccountarangeofcircumstancesoftaxpayers.Rather,thesimulationmodelisbasedonthebehaviourofasinglerepresentativehouseholdofeachgen-eration.Thismeansthatitcannotrevealeffectsonwithin-generationincomeinequalitywhich1DavidsonandGuest(2007)calculatedthepotentialfiscalcostsofthetaxexemptionofsuperannuationbenefitsinthefuturegivenalternativeassumptionsaboutincrea