Rafal Chomik and John Piggott
Abstract: Pension savings commonly attract lower taxes to encourage self-provision or to maintain neutrality between current and future consumption. As a result, in countries where funded pensions are prominent, tax costs appear large and poorly targeted while benefits seem unsubstantiated. Yet much of the criticism of tax arrangements is misconceived. In this paper we explain the basic concepts, tackle concerns related to the scale and fairness of tax expenditures, and present policy reform proposals. We do this by way of illustrative examples of saving over the lifecycle and across the earnings distribution. These are based on the Australian retirement income system – an instructive case, since it has significant pre-funding and high levels of measured tax expenditures that, in turn, attract considerable political interest.