Impact of tax induced retirement benefit schemes on consumption and saving in South Africa

Abstract

This article empirically analyses the impact that tax induced retirement benefits (pension payouts) have on contractual saving and consumption behaviour in South Africa. By using a basic extended Ando-Modigliani life cycle model it is shown that pension payouts accumulated through deductible contributions to retirement schemes contribute towards increased levels of consumption expenditure with the crowding out of discretionary household saving. The results also suggest that the taxing of retirement benefits under the current tax structure may discourage individuals to save through retirement schemes and instead encourages increased levels of current consumption expenditure. The econometric technique used is the Engle-Granger (1987) method of estimation. Estimates of the impact of retirement benefits on consumption expenditure are robust also when regressed on per capita government deficit ratios and unemployment. Thus, the tax treatment of retirement schemes in South Africa may have adverse effects on saving largely influenced by the discounted value of retirement benefits.