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

Derek Messacar

Journal of Pension Economics and Finance, 2018, vol. 17, issue 4, 534-553

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.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jpenef:v:17:y:2018:i:04:p:534-553_00

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