Abstract
This paper analyzes the effects of tax-based saving incentives on contribution behavior in Germany (Riester Pension). Using tax reform and inflation, the effect of the tax price on the decision of whether or not to contribute is analyzed. Our central estimate implies a local average elasticity of the contribution decision of -2.36. In addition, using shifts in price kinks over time, we show graphical evidence of the decision on how much to contribute. Our results show that taxpayers adjust their savings immediately if the subsidized amount increases. Consequently, the government has control over the contribution behavior on both margins by setting tax-based saving incentives.
Highlights
Old age provisions can be financed as a pay-as-you-go or fully funded system
We focus on parameters that the government has under its control and address these parameters to the contribution decision itself
In specification (II), we addressed the potential endogeneity of the tax price by instrumenting both the tax price and the income after taxes using the synthetic tax price and synthetic income after taxes as described above
Summary
Old age provisions can be financed as a pay-as-you-go or fully funded system. European countries usually have pay-as-you-go systems where current contributions are used to finance current provisions. Rising life spans and declining birth rates of the last decades have been generating a funding gap This could be addressed by reforming the pay-as-you-go system itself (e.g., increasing contributions, decreasing provisions, or through governmental grants) or by reforming the whole old age provision system. The success of retirement reform depends on the acceptance of private pensions and, on the effects of tax-based saving incentives on contribution behavior. The elasticity of the decision on the extensive margin with respect to the price after taxes shows how effective the governmental action is. We use the variation in the tax price of the first euro contributed over time to identify the impact of the subsidy on the decision of whether or not to contribute (extensive margin). Based on a short description of the last euro tax price and its price kink, the corresponding data are described and graphical evidence on the contribution behavior with respect to the price kink is shown
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