The Taxation of Pensions: Issues, Concepts and International Experiences

Thursday, January 17

Professor Robert Holzmann, Member of the Austrian Academy of Sciences
Bernd Genser, prof. emerit., University of Konstanz


On January 17, the Joint Vienna Institute hosted a public discussion of “Taxation of Pensions: Issues, Concepts, and International Experiences” by Professors Robert Holzmann from the Austrian Academy of Sciences and Bernd Genser from the University of Constance in Germany. They analyzed current pension taxation systems, emphasizing cross-border taxation, and suggested an approach that could help overcome certain problems of the present systems.

Today, public pensions comprise a variety of schemes, with different objectives, benefit types, and financing and taxation modes. Whether pension financing is funded or unfunded often creates differences in the tax treatment of pension benefits. Professor Holzmann explained that to compare national pension tax practices, it is necessary to distinguish the three points in the pension cycle where income taxes can be levied: contributions/savings (accumulation), returns on accumulations, and benefits’ payment/dis-saving (de-cumulation). A recent survey of pension taxation in OECD and other countries finds a variety of rules for taxing different types of pensions. Deferred taxation, the E-E-T system, in which both the savings and the returns are exempt and only the disbursement of benefits is taxed, appears to dominate current taxation of public pensions.

Professor Genser pointed out that the tax treatment of pensions becomes more complex when individuals earn pensions in countries other than where they reside and benefits are paid across borders. The rising mobility of both workers and pensioners will substantially increase the number of people who receive cross-border pension benefits. For example, in 2015, 7 percent of German pensioners lived in other countries and 5 percent of non-German pensioners lived in Germany; the numbers of both have been trending up in recent years.  

Bilateral treaties have been effective in preventing double taxation of pension benefits, and a country typically has several such treaties. The treaties usually embody one of two rules: either only one country (source or residence) retains the right to tax pensions, or both countries have the right, but the country of residence allows tax credits to individuals receiving cross-border pensions.

The speakers then went on to explain the “fairness dilemma” that has arisen from the E-E-T tax structure. Professor Genser pointed out that, on one hand, a source county loses tax revenues if pension payouts are taxed in the residence country. On the other hand, migrant pensioners are double-taxed if a source country tries to close the tax income gap by, for example, taxing pension contributions and the country of residence taxes the benefits.

The speakers suggested moving to front-loaded taxation, where pensions would be pre-taxed in the source country and benefits would be exempt in both residence and source countries. Professor Genser suggested that if all countries move to such a system, there will be no need to worry about double taxation, no loss of tax revenue for source countries, and no fairness dilemma. Among other potential advantages would be lower costs for ensuring compliance and administration of pension taxation.

The suggested approach might seem to imply that tax liabilities would need to be paid when income tax is assessed, which seemingly would reduce the disposable income of workers. Professor Genser noted that payment of assessed tax liabilities may be deferred, as taxation of pension benefits is in current systems. This would have a neutral effect on the government’s fiscal position and imply the same cash flow effect as deferring the benefit tax.   

Professor Genser concluded that there is a need for more efficient pension taxation, both to protect national tax revenue and to simplify tax administration and improve compliance. The proposed approach is an attempt to open a discussion within the EU and beyond on future policy. 

The Q&A session that followed the presentation was lively. The audience sought, among other things, to get the speakers’ views on how long it would take to transition to a new system and on the role of financial education if such a reform were adopted. The speakers explained that any new system would need to be comprehensive, cover all pillars of the pension system, and have immediate effect for tax payments. At the same time, they consider the recommended system to be simple and easy for taxpayers to understand.

Asel Isakova, Senior Economist, JVI


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