Tax advantage

Tax advantage refers to the financial gain which applies to certain accounts or investments. These include accounts that are, by statute, tax-reduced, tax-deferred, or tax-free.^[1] Governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest. An example is retirement plans, which often offer tax advantages to incentivize savings for retirement.^[2] In the United States municipal bonds may also be exempt from certain taxes.^[3]

In countries in which the average age of the population is increasing, tax advantages may put pressure on pension plans.^[4] For example, where benefits are funded on a pay-as-you-go basis, the benefits paid to those receiving a pension come directly from the contributions (money paid) of those of working age. If the proportion of pensioners to working-age people rises, the contributions needed from working people will also rise proportionately. In the United States, the rapid onset of Baby Boomer retirement is currently causing such a problem.^[5]

References

1. "Tax-Advantaged". Investopedia LLC. Retrieved 10 December 2015.
2. "Lots of Benefits - when you set up an employee retirement plan". IRS. Retrieved 10 December 2015.
3. Andrew Osterland (28 January 2014). "5 top tax-advantaged investments for 2014". CNBC.com. Retrieved 10 December 2015.
4. How Welfare States Shape the Democratic Public: Policy Feedback. eds. Staffan Kumlin; Isabelle Stadelmann-Steffen (Cheltenham, UK; Northampton, MA, USA: Edward Elgar, 2014), p. 229
5. Gayle L. Reznik; Dave Shoffner; David A. Weaver. "Coping with the Demographic Challenge: Fewer Children and Living Longer". Social Security Bulletin, Vol. 66, No. 4, 2005/2006. Retrieved 10 December 2015.