The budgetary and redistributive impact of pension taxation in the EU: A microsimulation analysis

Pension taxation has large budgetary and distributional effects, in particular in the light of ageing societies and the importance of pension benefits in old-age income. This paper investigates the impact of taxing public and mandatory occupational old-age pensions in the EU, focusing on both contributions and benefits. Using the microsimulation model EUROMOD, we simulate two hypothetical taxation scenarios for the 27 Member States of the EU. While the double exemption scenario (EE) fully removes pension taxation, the double taxation scenario (TT) fully taxes pension benefits and does not exempt pension contributions. A switch to the EE scenario is associated with a fiscal cost of 0.9% of GDP, whereas the adoption of the TT scenario would lead to a fiscal gain of 1.2% of GDP, abstracting from behavioural reactions. Rich taxpayers tend to gain relatively more compared to the poor under the EE scenario because of progressive personal income taxation in a majority of countries, while the opposite holds for the TT scenario. The distributional impact, nevertheless, depends also to a large extent on the relative importance of public and mandatory occupational pension benefits in old-age income.