Working Papers

Abstract: This paper argues for retirement policy formulation and reforms to re-orient towards greater reliance on non-contributory means tested pensions as a primary retirement income delivery structure. These pensions will become more relevant as the number of contingent workers increases in the global north; and have the potential to reach informal workers in emerging economies who have exhausted their earnings capacity. We show that this kind of pension structure can be efficient, equitable and sustainable. If properly designed, it is especially well-suited to an ageing demographic. We briefly discuss the Australian model as an example of how well this can work.

Keywords: Pensions, retirement policy, labour market, population ageing

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2019Feb

Tax Progressivity in Australia: Facts, Measurements and Estimates

Chung Tran and Nabeeh Zakariyya

We study the progressivity of Australia's personal income tax system after the introduction of a New Tax System (Goods and Services Tax) Act 1999. We use two data sets: administrative data from Australian Tax Office (ATO) 2004-16 and survey data from the Household Income and Labour Dynamics in Australia (HILDA) survey 2001-16. We first document the distributions of income and tax liabilities, properties of the joint distributions of taxes paid and income, and discuss how taxes are varied across households and over time. We next provide estimates of tax progressivity using two approaches: one based on tax liability progression and one based on tax liability distribution relative to income distribution. The result based on the tax progression approach implies a significant decline in the average level of tax progressivity since 2004. Meanwhile, the result based on the tax distribution approach indicates a tax progressivity cycle with a modest decline up to 2006, then a sharp increase until 2010, and a slight decline thereafter. The personal income tax cuts for all taxpayers in the early 2000s and the introduction of tax offset for low income earners (LITO) are main driving forces. Moreover, the evolution of income distribution and interactions between income distribution and bracket creep strongly affect the overall progressivitiy level of Australia's income tax system. Hence, our findings provide insights into the dynamics of income adn tax progressivity, and a new reference for public debated on tax reform in Australia.
Keywords: Taxation, progressiveness, income dynamics, inequality, parametric tax function, Suits index, Kakwani index.

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2018Dec

Is There a Demand for Reverse Mortgages in China? Evidence from Two Online Surveys

Katja Hanewald, Hazel Bateman, Hanming Fang and Shang Wu

Reverse mortgages provide an alternative source of retirement funding by allowing older homeowners to borrow against their home. However, a recent pilot program of reserve mortgage products in several large Chinese cities saw almost no take up. To ascertain the demand for reverse mortgages in China, we conduct and analyze two online surveys that focus respectively on homeowners aged 45-65 as potential purchasers, and on adult children in the 20-49 age group representing children of potential purchasers. We address the reported shortcomings of the pilot reverse mortgage product by testing an improved product design presented in a clear and comprehensive format. In stark contrast, we find that 89% of older Chinese homeowners would be interested in this new reverse mortgage product, and 84% of adult children would recommend such a product to their parents. Participants in both surveys reported that they would use the reverse mortgage payments to fund a more comfortable retirement and to pay for better medical treatments and aged care services. Respondents’ interest in reverse mortgages was associated with their familiarity and understanding of the product, and its perceived potential to address liquidity constraints in retirement. Health status, aged care preferences and proxies for intergenerational links were also important. Our results are contrary to the common perception of intergenerational expectations of wealth transfer in China, and provide new evidence in support of the potential development of China’s reverse mortgage market.

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2018Dec

Progressive Tax Changes to Superannuation in a Life Cycle Framework: Australia

George Kudrna and Alan Woodland

Private pension pillars around the world benefit from concessional tax treatments that aim to increase private retirement incomes and house- hold savings. As shown in table 14.1, most countries tax their private pensions under the “Exempt-Exempt-Taxed” (EET) regime, in which contributions and fund income are exempt from any taxation but ben- efits are treated as ordinary income and taxed progressively. An alterna- tive approach is the “Taxed-Exempt-Exempt” (TEE) regime, which allows no deductions of contributions from gross income but then applies no further tax. By contrast, the existing tax treatment applied to Australia’s superannuation (Australia’s term for private pensions) features a flat tax rate on contributions and fund income, with benefits generally tax-free. As the statutory rate of this flat tax on contributions and fund income is 15 percent,1 the system is concessional for most income earners compared to progressive personal income taxation.2The concessions, however, flow largely to high-income earners, as dem- onstrated by Ingles and Denniss (2009) and Australia’s Future Tax Struc- ture (AFTS) (2008, 2010). For instance, AFTS (Australia’s Future Tax Structure 2008, 22) estimates that over 37 percent of concessional con- tributions go to only those Australians whose incomes are in the top 5 percent.

Keywords: Pension, concessional tax, superannuation, tax changes, Australia

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2018Dec

Taxing Pensions: The Australian Approach

Hazel Bateman

The increasing prevalence of funded private pension systems world- wide raises questions about how retirement savings and benefits should be taxed. The three most important questions in pension taxation are: (1) At what point should pension savings be taxed? (2) Should the tax regime for pensions be integrated with personal income taxes or be sepa- rate? (3) How preferential should the taxation of pensions be? Australia’s experience with the tax treatment of private retirement savings (known in Australia as superannuation) brings considerable insight to these questions.

Pension savings can be taxed at one or more of three points—at the time of contribution, as fund earnings accrue, and/or at the time ben- efits are received. Most countries exempt (E) contributions and fund earnings from taxation and tax (T) benefits under a postpaid expendi- ture tax (EET) regime. In most cases, the benefits are treated as ordinary income and taxed progressively under the personal income tax sched- ule. Some countries tax contributions and fund earnings under a com- prehensive income tax (TTE) regime. Alternatives include a prepaid expenditure tax (TtE) under which contributions are taxed, fund earn- ings are exempt (except for excess returns),1 and benefits are exempt, or a hybrid approach (TTT) whereby pension savings are taxed at all three points.

Keywords: Pension, savings, income tax, retirement savings, Australia

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2018Dec

Tax Expenditures on Pensions: Concepts, Concerns and Misconceptions

Rafal Chomik and John Piggott

Tax expenditures occur when the tax treatment favors a certain activity. The forgone tax is thought to be analogous to spending and can thus attract commensurate attention. This concept was first articulated some 50 years ago by Stanley Surrey of the US Treasury Department (Surrey 1969), but exemptions to tax are as old as tax itself.1,2

As governments around the world look at ways to balance their budgets, tax expenditures will increasingly and justifiably come under scrutiny. This is particularly the case in countries with expanding funded pensions that seek to encourage self-provision for retirement or to main- tain neutrality between current and future consumption. Such arrangements can make the tax costs appear large and skewed toward the rich, while the benefits, which are far in the future, seem unsubstantiated.

Keywords: Tax expenditures, budgets, pensions, retirement, tax costs

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2018Dec

Learning to Value Annuities: The Role of Information and Engagement

Hazel Bateman, Ralph Stevens, Jennifer Alonso Garcia and Eduard Ponds

Using an online experimental survey we investigate perception (in terms of understanding, riskiness and control) and valuation (elicited using iterative multiple price lists) of lifetime annuities relative to ﬂexible drawdown products. We ﬁnd that for those participants who are engaged with the experimental tasks, information provision and an online calculator can substantially reduce or eliminate behavioral drivers of the complex task of valuation of annuities. Providing balanced information and multiple opportunities to learn about the key features of the products, including impact of potential outcomes, narrows the gap between the willingness to pay and willingness to accept, and, oﬀsets the eﬀects of low ﬁnancial capability, information framing and real-world institutional settings.

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2018Dec

Health Risk, Insurance and Optimal Progressive Income Taxation

Juergen Jung and Chung Tran

We study the optimal progressivity of a personal income tax system in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our results, based on a dynamic general equilibrium model calibrated to the US economy, indicate that accounting for health risk substantially aects the social insur- ance/redistribution role of a progressive income tax system. When health risk is present but access to health insurance is limited, the optimal income tax system is more progressive in order to provide more social insurance/redistribution to unhealthy low income individuals. However, when more inclusive health insurance systems are considered, such as Medicare for all, then the optimal level of tax progressivity decreases signicantly. Importantly, when health expenditure risk is eliminated, the optimal income tax progressivity becomes more similar to the optimal progressivity level in previous studies using models with income risk only.

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2018Dec

The Chinese Pension System

Hanming Fang and Jin Feng

A detailed overview of the current state of the Chinese Pension System, as well as its development, its problems and some ideas for future reforms.

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