Social Security Reform in Advanced Countries: Evaluating Pension Finance

By Toshihiro Ihori; Toshiaki Tachibanaki | Go to book overview
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present, the treatment of pensions for income taxation is complicated in Germany. Only about 25-30 percent of the amount of each individual public pension is considered taxable income. Given that the German marginal income tax is zero in the range between DM0 and about DM13,000 for singles and between DM0 and about DM26,000 for married couples, if pensioners have no other major source of income, they do not pay income tax on their pensions if they do not exceed DM42,000 per year. This is puzzling, because a major share of contributions to social security is essentially tax free. Compared to conventional aims of income redistribution, a regular tax treatment of pensions may be more appealing than a general downward adjustment of the replacement rate. Still, a drastic increase in the tax burden on social security pensions is unlikely to happen. One reason could be government's concerns about the opposition of the elderly voters against a regular tax treatment.

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