Every year, millions of taxpayers receive large tax refunds. But what effect does this excessive tax deduction have on retirement savings behaviour? What if the tax return offered an additional opportunity to invest in retirement savings? A new study by Dr Michael Milde (Chair of Business Taxation), Professor Dr Kay Blaufus and Marcel Schäfer (both of Leibniz University Hannover) reveals that: Excessive tax deductions significantly reduce private pension provision. This is due to a psychological anchoring effect: many people base their savings on their monthly net income, paying too little attention to tax refunds at the end of the year. However, even a small change can make a big difference. If an additional savings option is included in the tax return, as is the case in the USA but not in Germany, savings can increase significantly, especially if the option is clearly visible and easy to use. The design of the tax system also plays a role: pension products that are taxed immediately, such as Roth IRAs, lead to higher real savings on average than models with deferred taxation. The results are based on three extensive experimental studies involving over 1,600 participants, and they provide robust evidence of the interplay between tax frameworks and behavioural economic effects. The key finding is that tax structures influence pension behaviour through economic incentives and psychological mechanisms such as anchoring and nudging. Even seemingly technical details, such as the timing of tax deductions or the design of forms, can be pivotal. The study has been published in the renowned journal Contemporary Accounting Research:
Taxes and Pensions
New study: Excessive tax deductions significantly reduce private pension provision
Contact
Dr. Michael Milde
Chair of Business Taxation (interim professor)
Tel. +49 551 39-27308
michael.milde@uni-goettingen.de
