Pension fund taxation and risk-taking: should we switch from the EET to the TEE regime?

Most countries tax retirement savings according to the EET (exempt contributions, exempt accumulations, taxable withdrawals) regime. Relevant literature recommends the use of TEE (taxable contributions, exempt accumulations, exempt withdrawals) or EET systems and emphasizes their near equivalence. We show that this near equivalence breaks down when considering the tax effects on risk-taking. This paper proves that the TEE regime is risk-taking neutral, while the EET regime does not, in general, respect this property. The argument of risk-taking neutrality thus calls for broadening the use of the TEE configuration. Copyright Springer-Verlag 2013