Tax Effects on Households’ Choice of Pension Savings

This study’s purpose is to analyze the ways in which tax benefits for deductible voluntary private pension savings affects households’ investment decisions with the finance panel survey data of the Korea Institute of Public Finance. The analyses focus on whether the reduction in the marginal tax rates affects households’ investment at the contribution stage of pension savings products which are tax-favored assets. The regression results support the expectation that the marginal tax rates at the contribution stage have a positive association with both the annual contributions for pension savings products and their proportion to the increase in financial assets. The empirical results of higher marginal tax rates leading to higher level of contributions indicate that for households with low-income or high deductible expenditures, limited incentives exist for registering or contributing to pension savings products. Namely, there are policy limitations in that the households who truly need policy support and lack the means to acquire financial resources for old age are unable to enjoy the tax benefits for pension savings products.