Don’t give pension saving tax breaks to the poor – they can’t afford to take advantage of them, says an international think-tank that comes up with financial policy for governments.
Instead of wasting the retirement incentives on the poor, they should be aimed at high earners who struggle to save enough to give them a good replacement income once they have stopped working.
That’s the opinion of the Organisation of Economic Co-operation and Development, a talking shop for 34 of the world’s richest nations that came up with the Common Reporting Standard.
The CRS has revolutionised tax data sharing for more than 100 countries intent on cracking down on offshore tax avoidance by individuals and companies.
In the latest edition of the OECD’s Pensions Outlook, pensions analyst Stephanie Payet argues that governments should act to help lower paid workers save for their retirements, but should not offer them the same deal as high earners.
Flat rate tax relief
She advocates a flat rate of tax relief rather than one based on the taxpayer’s marginal rate of income tax.
“A 33% flat rate of tax relief could both reduce the differences between income groups, without necessarily removing the incentive to save for any individual,” Payet said.
“When you look at the different replacement rates, the higher the income, the lower the replacement rate for the pension systems.
“You can use the financial incentives to target towards those who are not able to maintain the standard of living with just the mandatory pension system.
“For low income earners, they are not very sensitive to tax incentives. The nice feature of non-tax incentives is they are not linked to the tax bracket. Non-tax incentives provide higher tax advantages to low earners.”
Praise for governments
Overall, the OECD report praises governments for upgrading pension systems to make them more sustainable in the face of challenges such as increasing longevity, low growth and lower returns on savings.
“Pension reform remains a continuing challenge as countries need to ensure people get an adequate pension while remaining affordable,” said OECD Secretary-General Angel Gurría.
“Many countries have introduced automatic mechanisms to adjust pension benefits to economic and demographic developments, as well as default options to help people that do not want to or cannot make choices.