Pricing annuities: The role of taxation in retirement decisions
This paper investigates the role of taxation in individual annuitization decisions by exploiting differences in relative taxation between the one-off lump sum payment and the life-long annuity. In a first step taxes are imputed for both the lump sum and the annuity for each individual whose retirement choice is recorded in an administrative dataset from a large Swiss pension fund. Using a variety of measures of taxation we show that taxes can explain a significant part of the variation in annuity rates. Furthermore, exploiting kinks in the tax schedule within a regression discontinuity framework we find evidence for tax optimization strategies by individuals. The results of this paper suggest that individuals react strongly to tax incentives when making retirement choices.
D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving ; H24 - Personal Income and Other Nonbusiness Taxes and Subsidies ; J26 - Retirement; Retirement Policies