Size and distributional pattern of pension-related tax expenditures in European countries

Abstract

Policy discussions on pension systems generally focus on their sustainability and design, including retirement age, income reference and contributory period, with relatively little attention devoted to the tax treatment of pension contributions and pension benefits. However, tax expenditures-defined as deviations from an agreed benchmark tax systemare widely used in EU Member States, and little is known about their fiscal and distributional impact. This paper quantifies the fiscal and distributional impact of tax expenditures related to public and private contributory pension schemes, affecting both contributions and pension benefits, in 28 European countries using EUROMOD, the EUwide microsimulation model. We find that pension-related tax expenditures can have a sizeable impact on revenue and strong effects on inequality and poverty. Tax expenditures tend to be progressive on two levels: first, among pensioners, by favoring those with lower incomes, mainly as a result of the preferential treatment given to pension incomes; and, second, among people of working age, through a partial or no deduction of pension contributions, draining resources from those at the top of the income distribution. Moreover, embracing a lifetime perspective, tax expenditures tend to redistribute resources in favor of women and low educated individuals.

Does it pay to say ‘I do’? Marriage bonuses and penalties across the EU

“…The term 'tax expenditure' usually indicates the cost in lost revenue resulting from tax reliefs. These tax expenditures can be quantified and their redistributive capacity analysed by comparing them with assumed counterfactuals without tax rebates (see, e.g., Barrios et al (2019) on pension expenditures and Barrios et al (2020) on health, education and housing expenditures). 10.…”

“…them with assumed counterfactuals without tax rebates (see, e.g.,Barrios et al (2019) on pension expenditures andBarrios et al (2020) on health, education and housing expenditures).3 seeSinfield (2012), page 24.…”

Are Dutch Old-Age Pensions Taxed Fairly and Efficiently?

“…Moreover, no transparent relationship exists between mandatory contributions and the pay-as you-go financed pension claims of future pensioners. This might explain why no data for the Netherlands can be found in relevant expenditure tax reports of the OECD (2010, 2018) and the EU (Barrios et al 2018). But net tax expenditure figures for Canada and the United States of roughly 1% of GDP are close to figures calculated by Caminada and Goodswaard (2008), who quantified the revenue effects of tax facilities for pension saving.…”

The removal of tax expenditures from Spanish personal income tax: Impact on tax collection and income distribution

“…Barrios et al (2019) quantify the effects of tax expenditures related to housing, education and health in 27 European countries, and find that their redistributive impact can be progressive or regressive, depending on the country and the tax expenditure examined, and that the impact on tax revenue can be sizeable. Barrios et al (2020) find that public and private pension‐related tax expenditures in EU Member States can have a sizeable impact on revenue and strong effects on inequality and poverty.…”