Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-25T06:16:42.825Z Has data issue: false hasContentIssue false
  • English
  • Français

The effect of tax withholding on pre-retirement savings withdrawals: evidence from Canada

Published online by Cambridge University Press:  29 August 2017

DEREK MESSACAR
DEREK MESSACAR*
Affiliation:
Social Analysis and Modelling Division, Statistics Canada, 100 Tunney's Pasture Driveway, Ottawa, Ontario, K1A 0T6, Canada (e-mail: [email protected]) Department of Economics, Memorial University of Newfoundland, 230 Elizabeth Avenue, St. John's, Newfoundland and Labrador, A1B 1T5, Canada
Get access Rights & Permissions [Opens in a new window]

Abstract

This study assesses the effect of tax withholding on pre-retirement withdrawals from a tax-preferred savings account in Canada. Using a large sample of administrative tax records and exploiting inter-provincial variation in tax withholding rates over time in the identification, the withdrawal elasticity to the net-of-tax withholding rate is estimated to be approximately 0.40 for many prime-aged savers. Hence, tax withholding discourages pre-retirement savings withdrawals and serves as a de facto savings commitment device. This finding is not well-explained by rational agency, and theories of present-biased time preferences and fiscal illusion are shown to be a better explanation of such behavior.

Keywords

D14D90H24H31Tax withholdingsavingsretirementpresent-biased preferencesfiscal illusiondifference-in-differencesbunching
Type
Article
Information
Journal of Pension Economics & Finance , Volume 17 , Issue 4 , October 2018 , pp. 534 - 553
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This paper is based on a chapter of my Ph.D. thesis from the University of Toronto. I am grateful to Robert McMillan and Michael Smart for their guidance and support. I also thank Gustavo Bobonis, Kory Kroft, Jessie Lamontagne, René Morissette, Carolyn Pitchik, Michael Veall, seminar participants at the University of Toronto and Canadian Economic Association 2012, as well as Dr Till von Wachter and two anonymous referees for helpful comments. Any errors are my own. The views and opinions expressed in this paper are those of the author and do not necessarily reflect the views of Statistics Canada or the Government of Canada.

References

Akyeampong, E. B. (1998) RRSP contributions and withdrawals: an update. Perspectives Catalogue No. 75-001-XIE, Statistics Canada.Google Scholar
Bernheim, B. D. (2002) Taxation and saving. In Auerbach, A. J. and Feldstein, M. (eds), Handbook of Public Economics, Volume 3. Amsterdam: Elsevier, pp. 1173–1249.Google Scholar
Bernheim, B. D., Fradkin, A. and Popov, I. (2015) The welfare economics of default options in 401(k) plans. Unpublished manuscript.Google Scholar
Blundell, R. and Hoynes, H. W. (2004) Has ‘work-in’ benefit reform helped the labor market? In Card, D., Blundell, R. and Freeman, R. B. (eds), Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980–2000. Chicago: University of Chicago Press, pp. 411–459.Google Scholar
Chetty, R., Looney, A. and Kroft, K. (2009) Salience and taxation: theory and evidence. American Economic Review, 99(4): 1145–1177.Google Scholar
Fahri, E. and Gabaix, X. (2015) Optimal taxation with behavioral agents. Working Paper Series 21524, National Bureau of Economic Research.Google Scholar
Feldman, N. E. (2010) Mental accounting effects of income tax shifting. Review of Economics and Statistics, 92(1): 70–86.Google Scholar
Finances Québec (2004) Information bulletin: modifications of the rules relating to tax withholding at source regarding amounts from an RRSP or a RRIF. Available online at www.finances.gouv.qc.ca/documents/Bulletins/en/bi2004-10-a-b.pdf.Google Scholar
Frenken, H. (1997) Low incomes and RRSPs. Perspectives 1997(Spring), Statistics Canada Catalogue No. 75-001-XPE.Google Scholar
Giles, P. and Maser, K. (2004) Using RRSPs before retirement. Perspectives Catalogue No. 75-001-XIE, Statistics Canada.Google Scholar
Gul, F. and Pesendorfer, W. (2001) Temptation and self-control. Econometrica, 69(6): 1403–1435.Google Scholar
Johnson, D. S., Parker, J. A. and Souleles, N. S. (2006) Household expenditure and the income tax rebates of 2001. American Economic Review, 96(5): 1589–1610.Google Scholar
Jones, D. (2012) Inertia and overwithholding: explaining the prevalence of income tax refunds. American Economic Journal: Economic Policy 4(1): 158–185.Google Scholar
Kaplow, L. (2015) Government policy and labor supply with myopic or targeted savings decisions. Working Paper Series 21109, National Bureau of Economic Research.Google Scholar
Kleven, H. J. and Waseem, M. (2013) Using notches to uncover optimization frictions and structural elasticities: theory and evidence from Pakistan. Quarterly Journal of Economics, 128(2): 669–723.Google Scholar
Krusell, P., Kuruşçu, B. and Smith, A. A. Jr. (2010) Temptation and taxation. Econometrica, 78(6): 2063–2084.Google Scholar
Laibson, D. I. (1997) Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112(2): 443–478.Google Scholar
Laibson, D. I., Repetto, A. and Tobacman, J. (1998) Self-control and Saving for Retirement. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 29(1), pp. 91–196.Google Scholar
LaLumia, S. (2013) The EITC, tax refunds, and unemployment spells. American Economic Journal: Economic Policy, 5(2): 188–221.Google Scholar
Mawani, A. and Paquette, S. (2011) Pre-retirement RRSP withdrawals. Canadian Tax Journal, 59(2): 183–219.Google Scholar
Milligan, K. (2010) Incomes in the transition to retirement: evidence from Canada. Working Paper Series 18051, National Bureau of Economic Research.Google Scholar
Morissette, R. and Drolet, M. (2000) Pension coverage and retirement savings of young and prime-aged workers in Canada: 1986–1997. Income Research Paper Series no. 9, Statistics Canada Catalogue no. 75F0002MIE.Google Scholar
Saez, E. (2010) Do taxpayers bunch at kink points? American Economic Journal: Economic Policy, 2(3): 180–212.Google Scholar
Saez, E., Slemrod, J. and Giertz, S. H. (2012) The elasticity of taxable income with respect to marginal tax rates: a critical review. Journal of Economic Literature, 50(1): 3–50.Google Scholar
Shapiro, M. D. and Slemrod, J. (1995) Consumer response to the timing of income: evidence from a change in tax withholding. American Economic Review, 85(1): 274–283.Google Scholar
Slemrod, J. and Gillitzer, C. (2014) Insights from a tax-systems perspective. CESifo Economic Studies, 60(1): 1–31.Google Scholar
Souleles, N. S. (1999) The response of household consumption to income tax refunds. American Economic Review, 89(4): 947–958.Google Scholar
Stephens, M. Jr. (2006) Paycheck receipt and the timing of consumption. Economic Journal, 116(513): 680–701.Google Scholar
Stepner, M. (2013) BINSCATTER: Stata Module to Generate Binned Scatterplots. Statistical Software Components S457709, Boston College Department of Economics.Google Scholar
Thaler, R. H. (1980) Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1): 39–60.Google Scholar
Thaler, R. H. and Benartzi, S. (2004) Save more tomorrow™: using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1): S164–S187.Google Scholar
Veall, M. (2001). Did tax flattening affect RRSP contributions? Canadian Journal of Economics, 34(1): 120–131.Google Scholar