Income and saving responses to tax incentives for private retirement savings

(Journal of Public Economics, 2022)

(with Marc K. Chan, Cain Polidano and Ha Vu)
Media: Aus Tax Policy, Melbourne Institute

Many governments offer tax concessions for retirement contributions. In this paper, we show that income responses are crucial for understanding their effectiveness in raising retirement savings and alleviating the fiscal pressures of population aging. Using tax register data, we study large changes in caps on tax-favored contributions to individual retirement accounts in Australia. We find that higher caps increase retirement contributions considerably, with around two-thirds of this response financed by increases in earned income. The resulting gain in income tax revenue offsets the fiscal loss from tax concessions, highlighting the importance of taking income and labor supply responses into account.

As governments try to contain rising expenditure on retirement pensions by increasing eligibility ages, there are concerns that such reforms disproportionately affect poorer households. Using detailed longitudinal data, I examine this trade-off in the context of an Australian reform that increased women’s pension-eligibility age from 60 to 65. While this reform significantly reduced government spending on women at affected ages, the negative effects on household incomes were concentrated among poorer households. These unequal impacts meant that the reform temporarily increased relative poverty rates among affected women by around 4 percentage points and inequality measures by 6 to 19 percent.

I revisit the labor supply effects of a major Australian reform that increased women’s pension age from 60 to 65. Atalay and Barrett (RESTAT 2015) studied these effects using repeated household surveys and a differences-in-differences design in which male cohorts form the comparison group. They estimate that the reform increased female labor force participation by 12 percentage points. Using earlier data, I show that the parallel-trends assumption did not hold before the reform because of a strong female-specific trend in participation rates across the relevant cohorts. Accounting for this trend, the estimated effect on female participation falls by two-thirds and becomes statistically insignificant at conventional levels.

Working papers

Shaping the habits of teen drivers

(with Timothy J. Moore; submitted)

Media: NBER Digest, The Conversation

Selected for 2022 NBER Summer Institute

We show that a targeted law can modify teens’ risky behavior. We examine the effects of an Australian intervention banning first-year drivers from driving late at night with multiple peers, which had accounted for one-fifth of their traffic fatalities. Using data on individual drivers linked to crash outcomes, we find the reform more than halves targeted crashes, casualties and deaths. There are large positive spillovers through lower crashes earlier in the evening and beyond the first year, suggesting broad and persistent declines in high-risk driving. Overall, the targeted intervention delivers gains comparable to harsher restrictions that delay teen driving.

In response to the increasing fiscal burden imposed by public-pension systems, many countries have successfully encouraged older workers to delay retirement. These career extensions may significantly affect both the hiring and firing decisions of firms and the career progression of younger workers. To study these effects, we leverage reforms in the Netherlands in 2011/12 that gradually increased the eligibility age for public-pension benefits across birth cohorts. Using administrative linked employer-employee data, we first show that the reforms have significantly extended careers, doubling employment rates at ages that were directly affected. Next, we show that firms respond by delaying hiring, and hiring fewer workers overall. Co-workers also experience slower earnings growth over the period of career extensions, which is mainly attributable to a reduction in hours worked rather than lower hourly wages, but their separation rates from the firm are not affected.