HOW best to encourage people to save for their old age? Governments face many trade-offs when dealing with this issue. In the long run, they want to reduce the dependence of citizens upon the state; in the short term, they may prefer workers to consume rather than save, in order to manage the economic cycle.
Another trade-off is between cost and simplicity. Governments offer tax breaks as an incentive to save for retirement, although it’s not clear whether such inducements increase the total amount of saving or merely cause workers to reallocate their savings to tax-favoured vehicles.
The greatest gains from such incentives tend to accrue to the better-off—they have more money to save, after all. But that makes pension tax breaks a tempting target when governments are trying to balance their budgets. Britain introduced a “simple” regime for pensions tax in 2006 and successive governments have been fiddling with the rules ever since. To control the cost, governments have introduced lifetime caps on pension pots and annual limits on contributions; to encourage saving, they have brought in auto-enrolment for pension schemes and investment...Continue reading
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