Derek Messacar is a Senior Research Analyst in the Social Analysis and Modelling Division at Statistics Canada. He is also an Adjunct Professor in the Department of Economics at Memorial University of Newfoundland and a Research Fellow of the Retirement and Savings Institute at HEC Montréal. His current research interests include behavioral responses to personal and
corporate income taxation, financial literacy, tax mistakes, and income inequality. He has published his work in journals including the Review of Economics and Statistics, National Tax Journal, and Journal of Pension Economics and Finance. Dr. Messacar received his B.A. from Brock University, his M.A. from the University of British Columbia, and his Ph.D. from the
University of Toronto.
Tax deductions on contributions to registered savings vehicles are a common policy tool used by governments in many industrialized countries to encourage people to save for retirement. However, these plans do not typically lock in funds, which means savers may also withdraw before retirement when their marginal tax rates are still high and forgo the tax benefit. In this
paper, we investigate the extent to which pre-retirement savings withdrawals respond to changes in the net-of-tax benefit of withdrawing and whether such behavior depends on the saver’s financial literacy. To that end, we link respondents of a nationally representative financial capability survey from Canada to over 15 years of administrative tax data. Our results show that the correlation between savings withdrawals and the effective marginal tax rate is negative for those with higher financial literacy, but much weaker and sometimes statistically insignificant for those with lower financial literacy. The findings suggest that
financial literacy is an important determinant of the extent to which tax-deductible savings plans are used efficiently for retirement purposes.