Abstract

Under the current tax system, the pension income tax is unfavorable to tax payers compared with the retirement income tax, and this unequal tax burden prevents people from actively joining the retirement pension plan. This study examines the difference between a tax burden of pension income and that of retirement allowance by using simulations. In this paper, expanding the pension income deduction is proposed as an alternative for reforming the current tax system in order to urge people to join the pension plan and to mitigate the tax inequality between the pension income and the retirement allowance. The result of analysis shows that the tax burden of the pension income is greater than that of the retirement allowance, specially, for higher income employees and long-term employed persons. It is necessary to reduce the extra tax burden of the pension income in order to increase the number of persons joining the pension plan. This study examines various alternatives that are expected to proliferate the pension plan, and suggests expanding the pension income deduction as a reasonable alternative for reforming the current tax system. By expanding the pension income deduction to the level of the earned income deduction, higher income employees and long-term employed persons is allowed to reduce a great deal of unfavorable tax increase of the pension income. The pension income is basically identical to the earned income, because both of them are deferred incomes and annually realized. Therefore, it is reasonable to increase the current pension income deduction to the level of the earned income deduction. Furthermore, since the pension income is capable of bearing tax less than the earned income, it may be necessary to increase the pension income deduction at least up to the level of the earned income deduction depending on the tax policy.

Keywords

• retirement pension plan
• retirement allowance
• retirement income tax
• pension income tax
• pension income deduction

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