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Enhancing Retirement Security Through the Tax Code: The Efficacy of Tax-Based Subsidies in Life Annuity Markets

Published online by Cambridge University Press:  16 June 2009

WILLIAM M. GENTRY  and
CASEY G. ROTHSCHILD
WILLIAM M. GENTRY
Affiliation:
Williams College
CASEY G. ROTHSCHILD*
Affiliation:
Middlebury College
*
*Corresponding Author: [email protected]
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Abstract

The under-development of existing annuity markets coupled with the secular trend away from traditional pensions towards defined contribution accounts in the U.S. raises significant concerns about the adequacy of retirement income for future retirees. We develop dynamic programming techniques to evaluate the efficacy of policies designed to address this concern by encouraging annuitization. Our analysis suggests that policies providing monetary incentives through the tax code can indeed significantly enhance annuitization among retirees: our central estimates suggest that tax-exemption based policies which have been recently proposed in Congress have the potential to increase annuitization by as much as $50,000 for each retired household, at a relatively modest revenue cost to the government. Similar sized policies based instead on refundable tax credits may be more desirable from both efficiency and distributional perspectives.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 9 , Issue 2 , April 2010 , pp. 185 - 218
Copyright
Copyright © Cambridge University Press 2009

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