Does a Decrease in Pension Taxes Increase Retirement Savings? An Experimental Analysis

In a series of online experiments, we examine whether increasing the incentives to save by reducing the income tax rate on pensions results in higher savings. Our findings show that reducing the income tax rate on pensions has almost no significant effect on savings behavior. However, if we vary the current tax rate at which savings are deducted, subjects adjust their savings. Our results are in line with the interpretation that subjects neglect the level of income taxes on pensions due to myopia or confirmation bias. This holds even if we draw attention to income taxes on pensions, for example, by introducing uncertainty about the future income tax rate on pensions. Taken together, governments that aim at increasing retirement savings should not rely on lower income taxes on pensions, but instead increase incentives that directly arise in the savings period. Moreover, our results also demonstrate that governments could significantly raise the average after-tax pension without changing the level of tax revenues simply by switching from a deferred to an immediate pension tax system