Journal of Pension Economics and Finance

Table of Contents - 2010 - Volume 9, Issue 02  

Articles

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

WILLIAM M. GENTRYa1 and CASEY G. ROTHSCHILDa2 c1

a1 Williams College

a2 Middlebury College

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.

(Online publication June 16 2009)

Correspondence:

c1 Corresponding Author: crothsch@middlebury.edu

Footnotes

We thank Ben Sykes for excellent research assistance and Jeffrey Brown for sharing computer code. We thank Anthony Webb, Margo Thorning, an anonymous referee, and seminar participants at Williams College for helpful comments. We are grateful to the American Council for Capital Formation for financial support. We are responsible for any errors.