Macroeconomic and Distributional Effects of Pension Taxation Reforms

We study the macroeconomic and distributional implications of the taxation regime applying to pension contributions and pensions benefits, in a quantitative OLG model that also accounts for heterogeneity between households within age groups. We carefully calibrate the model to reflect in detail the pension and tax system currently in place in the German economy. We find that, over the time horizonwe consider, exempting pension benefits rather than pension contributionswould reduce government debt, in the absence of fiscal response to increased deficits. We also show that higher tax burden is mostly borne by households at the bottom of the income distribution, implying non-trivial efficiency-equity trade-offs.