Promoting Business Pension Schemes by "Riester" and by Lump-sum Taxation Acc. To § 40b EStG: Theory and Measurement - Does the Abolishment of § 40b EStG Deteriorate the Income Situation of Retirees?

In order to focus on a unique way how to stimulate the establishment of business pension schemes in Germany, it is recently proposed to abolish the possibility to tax contributions to business pension schemes at a rather low flat rate. Instead, a general scheme of taxing old age pensions while leaving contributions tax free should be introduced. The present paper studies if this proposed tax change deteriorates the income situation of workers receiving business pensions. For the average worker, abolishing the flat tax rate regime does not reduce old age income net of taxes. Only if the employer - and not the employee - finances the contributions to the business pension scheme, a reduction in old age net income is likely. The reason for this outcome is that the employer has to pay a social security tax on the contributions to the business pension scheme if the flat tax rate regime is abolished. If, however, all contributions to business pension schemes were treated identically in the social security system independent of the way how contributions to business pension systems are stimulated, abolishing the flat tax rate regime is not disadvantageous to the average worker.