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DRAWING DOWN RETIREMENT SAVINGS—DO PENSIONS, TAXES AND GOVERNMENT TRANSFERS MATTER MUCH FOR OPTIMAL DECISIONS?

Published online by Cambridge University Press:  08 August 2018

Bonnie-Jeanne MacDonald ,
Richard J. Morrison ,
Marvin Avery  and
Lars Osberg
Bonnie-Jeanne MacDonald*
Affiliation:
National Institute on Ageing, Ted Rogers School of Management, 350 Victoria St., Toronto, Ontario, M5B 2K3, Canada
Richard J. Morrison
Affiliation:
Human Resources and Skills Development Canada (HRSDC) (Retired), Department of Economics, Dalhousie University, 6214 University Avenue, PO Box 15000, Halifax, NS B3H 4R2, E-Mail: Richard.jay.morrison@gmail.com
Marvin Avery
Affiliation:
Human Resources and Skills Development Canada (HRSDC) (Retired) E-Mail: Marvin_avery@yahoo.com
Lars Osberg
Affiliation:
Dalhousie University E-Mail: Lars.Osberg@dal.ca
*
E-Mail: Bonniejeanne_macdonald@hotmail.com
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Abstract

This paper examines the importance of pensions (employment and social security), taxes and government transfers for alternative retirement savings drawdown strategies (DS), compared to the conventional approach in published literature of using a gross income concept obtainable from retirement savings alone. Using a lifetime utility framework, our longitudinal dynamic micro-simulation model incorporates risk aversion, stochastic markets, stochastic mortality and the interactions among sources of retirement income within the complex Canadian tax and social benefit system, enabling us to rank commonly advocated DS and to ask whether incorporating pensions, taxes and transfers alters those rankings. Our findings show the importance of treating the evaluation of alternative DS as a comprehensive and integrated problem by including all sources of income — including pensions, taxes and government transfers. Using restricted income measures can potentially lead to simplistic, and possibly misleading, conclusions.

Keywords

Annuityself-managed retirement savings drawdowntaxesgovernment transferssocial securitycomprehensive and integrated retirement planningretirementlife-cycle modelstochastic micro-simulation
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 48 , Issue 3 , September 2018 , pp. 1277 - 1306
Copyright
Copyright © Astin Bulletin 2018 

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