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OECD finds wide variety in pension tax subsidies

GLOBAL - The Organisation for Economic Cooperation and Development has found that despite variations in the size of tax subsidy across different OECD member countries, most governments incur a sizeable positive net tax cost.

The findings come in an in-depth study into the tax treatment of private pension savings in OECD member countries.

"This paper provides, for all OECD countries, an estimate of the net tax cost per currency unit of contribution to a tax-favoured retirement savings plan, using a present-value methodology," states the study, a 107-page working paper prepared by Kwang-Yeol Yoo and Alain de Serres.

The paper concludes that the size of the tax incentive for investing in private pensions "varies significantly" across countries. It said the sum ranges from nearly 40 cents per unit of contribution in the Czech Republic to around zero in Mexico and New Zealand.

But it found a "sizeable" net tax cost - which it said underscored the importance of promoting private savings.

"However, despite the variations in the tax treatment of private pension savings, most OECD governments incur a sizeable positive net tax cost, amounting to at least 10 cents per unit of pre-tax contribution, underscoring the importance that governments give to the promotion of private savings."

Over half of the OECD countries incur a tax cost of more than 20 cents, but most OECD countries incur at least 10 cents of the net tax cost per unit of contribution. On the basis of contributions made in 2000, this paper finds that, the present-value estimates of overall budgetary cost of tax-favoured private pensions, vary from over 1.7% of GDP (Australia, Ireland, United Kingdom) to less than 0.2% (Japan, Slovak Republic).

It found that the tax cost (or incentive) is higher for younger age groups - reflecting the non-taxation of accrued investment income over a longer time horizon.

And the net tax cost was generally higher in countries with an EET scheme, and lower in countries such as Sweden and Italy who partly tax accrued return on investment.

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