Taxation Effects on the Optimal Pension Fund Portfolio
25 Pages Posted: 23 May 2010 Last revised: 3 Oct 2011
Date Written: March 28, 2011
The paper deals with taxation effects on optimal portfolio rules of de fined contribution (DC) and de fined benefi t (DB) pension funds in a continuous-time setting. Following practice, three tax types are considered: on contributions, investment gains and pensions. We focus on the tax effects on risk-taking. It is emphasized that the correct measure of risk-taking is not the entire risky asset proportion, yet the speculative fund. We show that the tax types able to possibly influence the risk-taking behavior are pension and investment gain taxes. Yet this potential ability concerns DC funds only, and the effect direction does not seem obvious. Risk-taking stays unchanged when applying taxes on contributions, as these affect the contribution hedging demand only. If a risk-taking - neutral fi scal policy is sought, contribution taxation thus constitutes the adequate tool.
Keywords: taxation, pension funds, optimal asset allocation, risk-taking, stochastic dynamic programming
JEL Classification: C61, G11, G23, H22, H39
Suggested Citation: Suggested Citation