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Tax-Deferred Savings and Early Retirement

Gaobo Pang () and University of Maryland

No 31, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: This paper analyzes effects of tax-favored savings plans on savings and retirement decisions in a realistically specified life-cycle model. Individuals face mortality risk and stochastic earnings, allocate assets between conventional savings accounts (CSAs) and tax-deferred accounts (TDAs), make endogenous choice of labor supply and retirement, and make a separate decision on claiming Social Security. The simulations reveal that there is a functional division to some degree between CSAs and TDAs, with the former serving mainly for liquidity and the latter for retirement and bequests. There is tremendous heterogeneity. The tax incentives are generally effective in stimulating new savings for the middle and upper income groups. The higher rate of return on TDAs facilitates wealth accumulation, which consequently and perhaps unintentionally encourages early retirement. Impatient and low-income individuals tend to retire and claim Social Security early. They derive less benefit from TDAs since they face lower marginal tax rates and they have limited resources to take advantage of TDAs. For them, the income effect dominates and TDAs fail to induce new savings

JEL-codes: E21 H55 H31 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
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