An International Comparison of Incentives for Retirement Saving and Insurance

Experts predict that today’s federal budget surpluses are likely to be a relatively short-lived phenomenon. The long-term prosperity of the United States remains threatened by the prospect of looming budget deficits arising from the need to fund the retirement of the baby boom generation in the next century. In addition, the U.S. saving rate continues to compare unfavorably with that of other nations, as well as with our own past experience; U.S. net domestic saving available for investment has averaged only 4.8 percent since 1991 compared to 9.3 percent over the 1960-1980 period. Though the U.S. economy is currently performing better than the economies of most other developed nations, in the long run low U.S. saving and investment rates will inevitably result in a growth rate short of this country’s true potential. A country’s saving rate is strongly correlated with its rate of economic growth, as shown in Figure 1.

[Figure 1: Correlation Between Saving Rates and Growth: An International Comparison (1980-1885)]

Note: For Singapore, the average saving rate uses data from 1980-1992; for the United Kingdom, 1980-1991; and for the United States, 1980-1993. Source: World Bank, World Development Indicators CD-ROM, 1997.

The ACCF Center for Policy Research presents this special report in order to stimulate debate on tax policy reforms that could encourage additional private saving and social security restructuring as well as the purchase of various types of mutual fund and insurance products to assist baby boomers as they retire in the twenty-first century.

This report is an analysis of a recent Center-sponsored survey of the tax treatment of retirement savings, insurance products, social security, and mutual funds in twenty-four major industrial and developing countries, including most of the United States’ major trading partners. The survey, compiled for the Center by Arthur Andersen LLP, shows that the United States lags behind its competitors in that it offers fewer and less generous tax-favored saving and insurance products than many other countries. For example:

  • Life insurance premiums are deductible in 42 percent of the surveyed countries but not for U.S. taxpayers; for many individuals life insurance is a form of saving;
  • Thirty-three percent of the sampled countries allow deductions for contributions to mutual funds while the United States does not;
  • More than half of the countries allow a mutual fund investment pool to retain earnings without current tax, a provision which increases the funds’ assets; the United States does not;
  • Thirty percent of the countries with a social security system allow an individual to choose increased benefits by increasing their contributions during their working years; and
  • Canada provides a generally available deduction of up to $9,500 (indexed) yearly for contributions to a private retirement account, compared to a maximum deductible Individual Retirement Account contribution of $2,000 for qualified taxpayers in the United States;

The Center’s study demonstrates that many countries have gone further than the United States to encourage their citizens to save and provide for their own retirement and insurance needs.

RETIREMENT SAVINGS
Country Gross domestic saving as a percent of GDP, 1997 Tax-favored retirement accounts? Deductible contributions? Annual limit on deduction? Changes in portfolio composition taxable?
Argentina 18.0 No* N/A N/A N/A
Australia 21.0 Yes No* No No
Belgium 22.0 Yes Yes Yes,* not indexed Generally yes; rate: 56.7%
Brazil 19.0 Yes Yes No No
Canada 21.0 Yes Yes Yes, approximately US$9,439 indexed No
Chile 25.0 Yes Yes Yes, approximately US$20,200 indexed N/A
China 43.0 No N/A N/A N/A
Denmark 24.0 Yes Yes Generally no* Generally yes;* rate: 58%
France 20.0 No N/A N/A No
Germany 22.0 Yes Yes Yes, approximately US$2,178 not indexed N/A
Hong Kong N/A No N/A N/A N/A
India 20.0 Yes Yes Yes, 20% of contribution, max. approx. US$306 indexed No
Indonesia 31.0 Yes Yes Yes* Yes, rate: 30% or 20% treaty rate
Italy 22.0 Yes Yes Yes, 2% of wages, max. approx. US$306 indexed No
Japan 30.0 No N/A N/A N/A
Korea 34.0 No N/A N/A N/A
Mexico 26.0 Yes Yes Yes, approx. US$420 per year indexed No
Netherlands 26.0 Yes Yes Yes,* indexed Generally yes
Poland 18.0 No N/A N/A N/A
Singapore 51.0 Yes Yes Yes, approximately US$8,559* not indexed No
Sweden 21.0 Yes Yes Yes, approximately US$2,300 indexed Generally no
Taiwan N/A No N/A N/A N/A
United Kingdom 15.0 Yes Yes Yes* No
United States 16.0 Yes Yes Yes* No
Summary 25% (average) 67% of countries answered yes 63% of countries answered yes 54% of countries answered yes 17% of countries answered yes

 

INSURANCE
Deductible national health insurance premiums? Deductible private long-term health insurance premiums? Deductible private life insurance premiums? Annual increase in life insurance surrender value taxable each year? Deductible payments to mutual funds for retirement purposes? Tax treatment of insurance annuity reserves:
Country for individuals? for employers? Investment income on reserves taxable? Individual taxed on receipt of annuity payments?
Argentina Yes Yes Yes subject to limits Yes subject to limits No No Yes, rate: 33% Yes, rate: 33%
Australia No N/A No* No No No Yes, rate: 36% Yes, rate: 33.5%
Belgium Yes Yes Yes Yes* No Yes* Yes, rate: 40.2% Yes, rate: 56.7%
Brazil Yes Yes No No No Yes* Yes, rate: 43% Yes, rate: 27.5%
Canada No Yes No No Yes No Yes, rate: 29.1% Yes, rate: 31.3%
Chile Yes Yes No No No Yes* Yes, rate: 15% No
China No Yes No No No N/A Yes, rate: 33% No
Denmark N/A N/A No No No No Yes, rate: 34% No
France Yes Yes No No No Yes, if retirement plan is compulsory Yes, rate: 41.7% Yes, rate: 58.1%
Germany Yes, subject to limits Yes Yes, subject to limits Yes, subject to limits No Yes, under certain conditions Yes, rate: 45% Generally yes,* rate: 55.9%
Hong Kong N/A N/A No No No No Yes, rate: 16% No
India N/A N/A Yes, up to approximately US$255 per year Yes* No No No Yes, rate: 30%
Indonesia No No No No Yes No Yes, rate: 30% No
Italy Yes Yes No Yes* No Yes* Yes, rate: 37% Yes, rate: 46%
Japan Yes Yes Yes, up to approximately US$383 per year Yes, up to approximately US$383 per year N/A No No Yes, rate: 50%
Korea Yes Yes No Yes No No N/A N/A
Mexico No Yes No No No No N/A N/A
Netherlands Yes subject to limits* Yes Yes subject to limits* Yes subject to limits No Yes, depending on fund type* N/A N/A
Poland N/A Yes No No No No Yes, rate: 36% Yes, rate: 40%
Singapore Yes* Yes No Yes subject to limits No Yes subject to limits Yes, rate: 26% Yes, rate: 28%
Sweden Yes Yes No No No No Yes, rate: 28% Yes, rate: 57%
Taiwan Yes Yes Yes* Yes No No Yes, rate: 25% Yes, rate: 40%
United Kingdom No Yes No No No No Generally no Generally yes
United States N/A N/A Yes subject to limits No No No Yes* Yes, rate: 39.6%
Overall number of countries answering “yes” 54% of countries answered yes 75% of countries answered yes 33% of countries answered yes 42% of countries answered yes 8% of countries answered yes 33% of countries answered yes 75% of countries answered yes 67% of countries answered yes

 

SOCIAL SECURITY TAXES
Country Possibility for individual to choose increased
benefits by increasing contributions?
Argentina Yes
Australia No social security taxes
Belgium No
Brazil No
Canada No
Chile Yes
China No
Denmark No
France No
Germany Yes under certain conditions
Hong Kong No social security taxes
India No social security taxes
Indonesia Yes
Italy Yes
Japan No
Korea No
Mexico Yes
Netherlands No
Poland No
Singapore No social security taxes
Sweden No
Taiwan No
United Kingdom No
United States No
Overall number of countries
answering “yes”
30% of countries answered yes

 

MUTUAL FUNDS
Can an investment pool retain earnings
without current tax?
Preferential capital gains
treatment for disposition
of interest in investment pool?
Country Ordinary gain Capital gain
Argentina Yes if qualifying fund Yes if qualifying fund No
Australia Yes Yes Yes
Belgium Yes Yes Yes
Brazil Yes Yes No
Canada No No Yes
Chile Yes for individuals Yes No
China N/A N/A N/A
Denmark No No No
France No No Yes
Germany Generally no Generally no No
Hong Kong Yes Yes N/A
India Yes Yes Yes
Indonesia No Yes No
Italy Yes Yes Yes, rate: 12.5%
Japan No No Yes
Korea N/A N/A N/A
Mexico Yes Yes No
Netherlands Yes depending on
type of fund*
Yes depending on type of fund* Generally yes
Poland Yes Yes Yes
Singapore Generally yes Generally yes Yes
Sweden N/A N/A N/A
Taiwan Yes Yes Yes
United Kingdom No Yes Yes if qualifying
fund (“PEP”)
United States No No Yes
Overall number of countries
answering “yes”
54% of countries
answered yes
63% of countries
answered yes
54% of countries
answered yes

 

*Notes on Retirement Savings
Argentina Col. 1: Contributions to certain approved private pension funds may be deductible.
Australia Col. 2: Superannuation accounts must be contributed to by an individual’s employer, currently at a minimum rate of 6 percent of salary. Amounts contributed on behalf of an employee are not taxable to the employee.
Belgium Col. 3: Limits vary depending on the type of fund to which contributions are made.
Denmark Col. 3: The maximum deductible annual contribution to a capital pension scheme is DKr 33,100 (US$4,833). Contributions to other pensions can be deducted without limit.
Col. 4: A payout from a capital pension (which is a lump sum payment) is subject to tax at 40 percent.
Indonesia Col. 3: The deductible annual contribution is limited to 5.7 percent of regular income for the government-sponsored program (i.e., Jamsostek) or 20 percent for a Ministry of Finance-approved private pension program.
Netherlands Col. 3: The deductible amount depends upon the amount of salary, the duration of employment, and the type of pension plan.
Singapore Col. 3: The annual deduction limit of S$14,400 (US$8,559) applies to contributions on ordinary wages. Contributions on additional wages not accruing on a monthly basis (e.g., bonuses, incentive payments) are subject to separate capping rules.
U. Kingdom Col. 3: The limit on deductibility of the contribution varies depending upon the type of plan and age of the individual. The minimum limit is 15 percent of earnings up to maximum earnings of £87,500 (US$144,445). The limit is indexed for inflation at the discretion of the government.
United States Col. 3: The limitation on deductibility of the contribution varies depending upon the type of plan (e.g., for contributions to an individual retirement account the annual limit is US$2,000), the individual’s amount of earned income, the individual’s overall income level, and the individual’s age.

 

*Notes on Insurance
Australia Col. 2: For families with taxable income less than A$70,000, a tax rebate of up to A$450 is allowed to encourage participation in private health insurance.
Belgium Cols. 3,5: Belgium provides a tax credit (computed by reference to various items) when premiums are paid on life insurance or contributions are made to a collective pension savings account.
Brazil Col. 5: Payments to domestic pension funds are deductible.
Chile Col. 5: Only payments to the mandatory retirement system are deductible.
France Col. 6: The taxable portion of an annuity payment decreases based on the age of the recipient.
Germany Col. 6: Payments received by an individual would not be taxable if the prerequisites for a tax-exempt life insurance policy are fulfilled.
India Col. 3: The individual is entitled to a tax rebate of up to 20 percent of life insurance premium paid, subject to the overall limit of Rs 12,000 (US$306) along with other items (e.g., contribution to a retirement fund).
Italy Col. 3: Up to a maximum of Lit. 2,500,000 (US$1,414), life insurance premiums paid can give rise to a nonrefundable tax credit of 19 percent of the premium paid.
Col. 5: For employees, same limits as for life insurance premiums. For professionals, the maximum deductible contribution to a retirement fund is 6 percent of income, not exceeding Lit. 5,000,000 (US$2,828) .
Netherlands Cols. 1,2: An individual can deduct public or private health insurance premiums only as an extraordinary expense and only above a certain percentage of the individual’s income.
Col. 5: See “Mutual Funds” notes section for comments on mutual funds in the Netherlands.
Singapore Col. 1: Singapore does not have national health insurance per se, but does have insurance plans established under the approved pension scheme (Central Provident Fund) instituted by the government.
Taiwan Col. 2: The deductible insurance premium is NT$24,000 (US$735) per person if the individual itemizes.
United States Col. 6: Income earned on reserves is taxable, however, a deduction is permitted to the extent the earnings are credited to the account of the annuity contract.

 

*Notes on Mutual Funds
Netherlands Col. 1: The tax treatment of mutual funds in the Netherlands varies significantly depending on the type of fund. One of the most important issues is the question of whether the fund is a legal entity or only a cooperation of a group of individuals. In the latter case the fund will be considered transparent, in other words, for tax purposes no fund exists and each individual will be considered participating in person for his share in the fund capital. In that case capital gains are nontaxable; ordinary income is taxable at progressive rates.If the fund is a legal entity, a distinction must be made between foreign funds and Dutch funds. Foreign funds are subject to a special Dutch tax treatment (taxability of a fictitious income); the taxability of Dutch funds depends upon whether the fund is a special qualifying fund. For a qualifying fund, capital gains are tax free; ordinary income is subject to tax at progressive rates.