Does changing tax treatment method increase private pension saving?

Chung Wonsuk

doi:10.23842/jif.2018.29.3.003

To enhance pension saving incentive to lower income earners and adjust tax favor to higher income earners, the Korean government changes the tax treatment method for the private pension contributions from tax exemption to tax credit in 2014. To assess the policy effect empirically, we analyze the policy effect by income level using the National Survey of Tax and Benefit Survey data from 2012 to 2016. We find two important pension saving behavior after changing the tax treatment method from the analysis. First, on average, private pension subscription has a negative causal relationship with the tax treatment method. We find that changing tax treatment method decreases the probability of pension subscription rate by 0.57%. However, for the pension subscription, there is no statistically significant evidence that a certain income group differently reacted to the new tax treatment method. Secondly, for the amount of pension contribution, changing the tax credit method decreased the pension contributions and compare to the higher income earners, the lower income earners decrease the amount of pension contribution more. Therefore, we conclude that, ironically, the new policy reduces the most needed group's pension savings. We claim that to make lower income earners save more pension fund the government needs to provide more customized incentives scheme.

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