The budgetary and welfare effects of tax-deferred retirement saving accounts

Shinichi Nishiyama ()

Journal of Public Economics, 2011, vol. 95, issue 11, 1561-1578

Abstract: The present paper analyzes the budgetary, macroeconomic, and welfare effects of tax-deferred retirement saving accounts, similar to U.S. 401(k) plans, in a dynamic general-equilibrium overlapping-generations economy with heterogeneous households. Because of the initial deferral of tax payments, the short-run budgetary cost of tax-deferred accounts is significantly higher than the long-run cost. Therefore, the budget-neutral introduction of tax-deferred accounts would make current and near-future households worse off, although it would increase national wealth and total output in the long run. If the government spread the short-run cost to future households by increasing debt, the policy change could make all age cohorts, on average, as well off as the economy without tax-deferred accounts. Due to increased government debt and debt service costs, however, national wealth and total output would decrease in the long run. Thus, introducing tax-deferred accounts would not increase national wealth and improve social welfare at the same time. This is partly because the policy change is regressive and reduces the risk sharing effect of the current income tax system.

Keywords: 401(k) plans; IRA; Dynamic general equilibrium; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: D91 E62 H31 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:95:y:2011:i:11:p:1561-1578

DOI: 10.1016/j.jpubeco.2011.07.010

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