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Tax-Deferred Retirement Savings in Long-Term Revenue Projections |
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May 2004 |
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This Congressional Budget Office (CBO) paper, requested by the Senate
Finance Committee, examines how long-term revenue projections are affected
by explicitly incorporating tax-deferred retirement savings. Using data
from tax returns in a model that it constructed, CBO estimates that federal
revenue will increase by 0.5 percent of gross domestic product over the
next 75 years as a result of tax-deferred retirement accounts. About one-half
of that increase will occur in the next 25 years.
The paper first describes the "life-cycle" of retirement accounts and
explains the revenue implications of each phase. It then illustrates how
revenues from retirement accounts are affected by demographic bulges such
as the baby boom and by tax incentives available outside of retirement
accounts, such as lower rates on capital gains and dividends. Finally,
it considers alternative scenarios to the base case in the model in order
to illustrate the effect of using different assumptions about such factors
as the economy, tax policies, and taxpayers' behavior in saving for retirement.
Paul Burnham of CBO's Tax Analysis Division wrote the paper under the
direction of Roberton Williams and G. Thomas Woodward. Within CBO, Paul
Cullinan, Robert Dennis, Douglas Hamilton, Arlene Holen, Benjamin Page,
John Sabelhaus, John Sturrock, and David Weiner provided useful comments
and assistance. In addition, Julia Coronado, Michael Boskin, Alan Auerbach,
William Gale, and Peter Orszag provided valuable criticism and suggestions.
John Skeen and John McMurray edited the manuscript, with assistance
from Allan Keaton. Denise Williams prepared early drafts of text. Lenny
Skutnik produced the printed copies, and Annette Kalicki prepared the electronic
versions for CBO's World Wide Web site.
Douglas Holtz-Eakin
Director
May 2004
Tables |
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1. |
Effects of an Instance of Tax Deferral on the Flows into and out of
Retirement Plans |
2. |
Effects of Ongoing Tax Deferral on the Flows into and out of Retirement
Plans |
3. |
Effects of a Baby-Boom Cohort on the Flows into and out of Tax-Deferred
Retirement Plans |
4. |
Tax Differences Associated with Tax-Deferred Retirement Plans Using
Different Tax Rates on Investment Income |
5. |
Effects of Tax-Deferred Retirement Plans Under Different Economic Assumptions |
6. |
Effects of Tax-Deferred Retirement Plans Under Alternative Policies |
7. |
Effects of Tax-Deferred Retirement Plans Under Different Assumptions
About Firms' and Individuals' Behavior |
A-1. |
Rates of Return Used in the Defined-Contribution/ IRA Module |
A-2. |
Rates of Return Used in the Defined-Benefit Module |
B-1. |
Tax Rates Applied in CBO's Base Case and in an Alternative Scenario,
by Type of Income |
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Figures |
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1. |
The Effects of Tax-Deferred Retirement Plans on Income Tax Receipts,
2003 to 2078 |
2. |
The Flow of Funds into and out of Defined-Contribution Plans and IRAs |
3. |
Tax Differences from Defined-Contribution Plans and IRAs |
4. |
The Flow of Funds into and out of Defined-Benefit Plans |
5. |
Tax Differences from Defined-Benefit Plans |
6. |
Net Flow of Funds into and out of All Tax-Deferred Retirement Plans |
7. |
Tax Differences from All Tax-Deferred Retirement Plans |
B-1. |
Sensitivity of Tax Differences to Inflation |
B-2. |
Sensitivity of Tax Differences to Real Wage Growth |
B-3. |
Sensitivity of Tax Differences to Interest Rates |
B-4. |
Sensitivity of Tax Differences to the Rate of Return on Equities |
B-5. |
Fiscal Improvement Due to Tax-Deferred Retirement Plans Under Different
Assumptions About Tax Rates |
B-6. |
Tax Differences Under Different Assumptions About When Nonfederal Defined-Benefit
Plans Have Full Funding Restored |
B-7. |
Tax Differences Under Different Assumptions About Contributions to
Back-Loaded Plans |
B-8. |
Tax Differences Under Different Assumptions About the Shift to Defined-Contribution
Plans |
B-9. |
Tax Differences Under Different Assumptions About the Growth in Contributions
to IRAs and Defined-Contribution Plans |
B-10. |
Tax Differences Under Different Assumptions About Withdrawals from
IRAs and Defined-Contribution Plans |
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Boxes |
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1. |
Projections Versus Cost Estimates of Deferred Tax Revenues |
A-1. |
Illustration of the Defined-Contribution Module for a Sample Cohort |
A-2. |
Illustration of the Defined-Benefit Module for a Sample Cohort |
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