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The effect of tax withholding on pre-retirement savings withdrawals: evidence from Canada

Published online by Cambridge University Press:  29 August 2017

DEREK MESSACAR
DEREK MESSACAR*
Affiliation:
Social Analysis and Modelling Division, Statistics Canada, 100 Tunney's Pasture Driveway, Ottawa, Ontario, K1A 0T6, Canada (e-mail: derek.messacar@canada.ca) Department of Economics, Memorial University of Newfoundland, 230 Elizabeth Avenue, St. John's, Newfoundland and Labrador, A1B 1T5, Canada
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Abstract

This study assesses the effect of tax withholding on pre-retirement withdrawals from a tax-preferred savings account in Canada. Using a large sample of administrative tax records and exploiting inter-provincial variation in tax withholding rates over time in the identification, the withdrawal elasticity to the net-of-tax withholding rate is estimated to be approximately 0.40 for many prime-aged savers. Hence, tax withholding discourages pre-retirement savings withdrawals and serves as a de facto savings commitment device. This finding is not well-explained by rational agency, and theories of present-biased time preferences and fiscal illusion are shown to be a better explanation of such behavior.

Keywords

D14D90H24H31Tax withholdingsavingsretirementpresent-biased preferencesfiscal illusiondifference-in-differencesbunching
Type
Article
Information
Journal of Pension Economics & Finance , Volume 17 , Issue 4 , October 2018 , pp. 534 - 553
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

This paper is based on a chapter of my Ph.D. thesis from the University of Toronto. I am grateful to Robert McMillan and Michael Smart for their guidance and support. I also thank Gustavo Bobonis, Kory Kroft, Jessie Lamontagne, René Morissette, Carolyn Pitchik, Michael Veall, seminar participants at the University of Toronto and Canadian Economic Association 2012, as well as Dr Till von Wachter and two anonymous referees for helpful comments. Any errors are my own. The views and opinions expressed in this paper are those of the author and do not necessarily reflect the views of Statistics Canada or the Government of Canada.

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