An International Comparison of Incentives for
Retirement Saving and Insurance

American Council for Capital Formation
June 1999

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 (*indicates note)
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 (*indicates note)
	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 (*indicates note)
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 (*indicates note)
	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.