Academic journal article Risk Management and Insurance Review

Tax Incentives and Household Investment in Complementary Pension Insurance: Some Recent Evidence from the Italian Experience

Academic journal article Risk Management and Insurance Review

Tax Incentives and Household Investment in Complementary Pension Insurance: Some Recent Evidence from the Italian Experience

Article excerpt


We show by a simple difference-in-difference methodology that, contrary to prior research, robustly raising the deductibility limit associated to pension fund holdings in Italy did not succeed in boosting households' contributions to this form of savings. Some other empirical findings also suggest that this policy measure may have not even increased the average amount of first-time contributors to such funds. In view of the specific features of the Italian market for complementary insurance (relatively young and less developed), these empirical results might be of interest to policymakers acting in countries with similar features (for instance, some of the more recent EU members).


During the last 30 years, the issue of retirement savings has become more and more important in the agenda of governments across industrialized countries, as public pension systems have progressively fallen short of providing adequate retirement insurance, also in view of increased longevity

The objective of stimulating private retirement savings has been pursued by governments by means of two set of measures. First, there have been registered efforts devoted to create an institutional environment favorable to private retirement savings, such as the introduction of more conservative asset management rules for private funded pension schemes.

Second, economic incentives aimed at increasing the convenience of retirement savings with respect to ordinary savings have been introduced. As underlined by Yoo and de Serres (2004), for a large number of OECD countries these policies are very relevant for public finances. According to their estimates, the present net value of revenues lost by governments as a consequence of fiscal incentive to private retirement savings can reach up to the 40 percent of total contributions to these tax-favored plans, and most OECD countries incur into a cost corresponding to more than 10 percent of the overall sums saved by individuals.

In year 2000, the budgetary costs of these measures, computed with an accrued criterion, has been larger than 1 percent of GDP for a high number of OECD countries. The main economic arguments that justify the loss of revenues implied by these policies, as summarized by Hubbard and Skinner (1996), originate from the existence of market and individual failures: without an appropriate intervention, the stock of capital is generally lower than its optimal social value; moreover, the constitution of an adequate pension can reduce future government's expenditure for impoverished elderly; lastly, families tend to be "impatient," that is, to overconsume in the present with respect to what would be done by a really rational agent. On the other hand, this kind of behavior could also be imputed to some form of hyperbolic discounting, as was made clear by Laibson (1997).

The economic literature in the field has therefore reached a wide consensus as regards the need of increasing family private savings of real world economies, but there is no consensus on the fact that fiscal incentives are really effective in pursing the objective of bringing a remedy to all the aforementioned market imperfections.

Indeed, if one considers the issue from a theoretical point of view, within the traditional life-cycle theory a fiscal incentive can be assimilated to an increase in the return of savings, originating two opposite effects: a substitution effect that increases saving and an income effect that reduces it. In general, the final effect cannot be established a priori without specifying consumer preferences. Moreover, the empirical analysis developed within this framework has not reached a clear answer over the sign of the relationship between the interest rate and savings.

The failure of the traditional theory in explaining real-world saving behavior has led many economists to consider the issue within the framework of behavioral economics (Thaler, 1994; Busana Banterle, 2002), where the hypothesis of full rationality is removed. …

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