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Economic Policy Reforms 2005

Going for Growth

image of Economic Policy Reforms 2005
Economic Policy Reforms: Going for Growth is a new annual periodical – intended as a complement to the OECD Economic Outlook and OECD Economic Surveys – which gives an overview of structural policy developments in OECD countries.  The report pinpoints structural policy priorities to enhance GDP per capita for all member countries, and ways to improve labour productivity and utilisation are identified on the basis of cross-country comparisons of policy settings.

A chapter presenting key structural policy indicators (including labour costs and taxation, unemployment and disability benefits, product market regulation, trade barriers, educational attainment and public investment) is followed by a comprehensive Country Notes chapter, consisting of individual analytical sections for each member country and the European Union.

Each issue of Economic Policy Reforms: Going for Growth will also present several in-depth thematic studies. The topics covered in this first issue are: product market regulation, retirement effects of old-age pension and early retirement schemes, female labour force participation and the long-term budgetary implications of tax-favoured retirement saving plans.

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Long-term Budgetary Implications of Tax-favoured Retirement Saving Plans

In most OECD countries, governments promote private pensions by means of tax incentives, most commonly in the form of a tax exemption on contributions and investment income, with taxation applying instead on pension benefits. This Chapter provides a projection over the next 45 years of the budgetary impact of tax-favoured private pension plans in 17 OECD countries. The findings suggest that aside from leading to a deferral of tax revenues, such tax treatment of private pensions represents a net cost for public finances, largely because the taxes foregone on contributions and asset accumulation exceed taxes collected on pension benefits. Going forward, as larger cohorts reach retirement age and pay taxes on pensions, the net budgetary cost is expected to diminish in the majority of countries, but the impact on public finances will likely remain negative in most cases. The reason is that tax-favoured private pension plans tend to be used mostly by upper-income individuals who would most likely have saved equivalent amounts even without incentives. The Chapter discusses a number of alternative policy options that may help to broaden participation among lowerincome earners so as to raise the impact on private savings and diminish the budgetary cost. Compulsion is one option. Another is to change the design of occupational retirement plans so that enrolment is the default option. The value of the tax incentives to participate could also be re-balanced in favour of lowerincome earners by replacing the tax deduction for contributions by a non-wastable tax credit.

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