Taxation, Retirement Saving, and Investor Behavior

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Intellectual Merits One component of this project investigates how taxes affect investor decisions about whichassets to invest in, and when to buy and sell those assets. The project will begin with an analysis ofdividend taxation and portfolio choice. The 2003 tax reform reduced the individual income tax burdenon dividend income by more than any other tax change in the post-war period. This tax change could have important implications for the willingness of high income, and otherwise high marginal tax rate, investors to hold dividend-paying stocks. Comparing data from various Surveys of Consumer Finances will provide insight on the way household portfolios have adjusted to the new tax regime.This project will also investigate how tax rules on capital gain distributions from mutual funds affectinvestor behavior. It will use a data set on trading patterns by investors in a mutual fund complex toexplore whether taxable investors are less likely to buy fund shares just before a taxable distribution.A second part of this project will analyze the market valuation of assets and liabilities incorporate defined benefit pension plans. . This project will investigate how the equity market valuesover- and under-funded corporate pension plans, and consider how this valuation pattern may affect firm decisions about the amount to contribute to their pension accounts. Taxes and ERISA regulations have created a time-varying set of incentives and requirements for funding defined benefit pension plans. Prior to the mid-1980s, firms were able to withdraw excess assets from over-funded pension plans, and many firms used their pension plans as vehicles for making tax-free financial investments. Beginning with the Tax Reform Act of 1986, however, excise taxes which are now set at 20 percent were levied on distributions of pension plan assets from overfunded plans. This project will explore how the stock market reacted to these taxes, and whether investors assigned greater value to the excess assets in over-funded plans in the early 1980s than in subsequent years.Finally, the last component of this project will explore the operation of annuity markets,which are an important source of retirement income security and will probably become even moreimportant in the future. One component of this research will investigate the extent to whichdifferences between the mortality rates of annuitants and the population at large can be traced tosocioeconomic differences between annuitants and non-annuitants, rather than to private information that annuitants have about their potential future mortality. A second component of this work will explore how changes in the set of characteristics that insurance companies are able to use in pricing policies, such as the elimination of gender-specific retirement annuities following the Supreme Court's Norris v. Arizona decision in 1983, affects the efficiency of annuity markets.Broader ImpactsThe aging of the U.S. population suggests that issues related to saving and the provision ofincome in retirement will grow increasingly important, both as concerns for policymakers and astopics for research in applied economics. All of the research subprojects described in this proposal are concerned with understanding how public policies, particularly taxes, affect wealth accumulation and the adequacy of retirement income support. Studying how the tax treatment of dividends and the tax rules governing mutual fund distributions affect household portfolios is a building block for broader analysis of the efficiency cost of taxation. Since more than 36 million households own taxable mutual funds, the distortions associated with mutual fund taxation may now influence a substantial group of investors. The research on the valuation of corporate pension assets and on the operation of annuity markets is related to an ongoing national debate on retirement income security. The recent prospect of several large under-funded corporate pension plans being transferred to the Pension Benefit Guarantee Corporation (PBGC) has led to calls for regulatory changes with regard to corporate pension contributions. Part of this research will provide input on the potential determinants of corporate pension contributions, while the other work, on annuity markets, will generate insights on the possible role of annuity markets in financing the draw-down of assets in individual account Social Security systems.