معاوضه بین پرداخت وام مسکن و پس انداز بازنشستگی مالیات معوق

Many households face the tradeoff between paying an extra dollar off the remaining mortgage on their house and saving that extra dollar in tax-deferred accounts (TDAs) used for retirement. We show that, under certain conditions, it becomes a tax arbitrage to reduce mortgage prepayments and to increase TDA contributions because of the tax deductibility of mortgage interest and tax-exemption of qualified retirement savings. Using data from the Survey of Consumer Finances, we document that a significant number of households that are accelerating their mortgage payments instead of saving in TDAs forgo a profitable tax arbitrage opportunity. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity or other financial constraints. Rather, the observed behavior can be attributed to a certain extent to the reluctance of many households to participate in financial markets as either lenders or borrowers.

Many households face the tradeoff between paying an extra dollar off the remaining mortgage on their house and saving that extra dollar in tax-deferred accounts (TDAs) used for retirement. We show that, under certain conditions, it becomes a tax arbitrage to reduce mortgage prepayments and to increase TDA contributions because of the tax deductibility of mortgage interest and tax-exemption of qualified retirement savings. Using data from the Survey of Consumer Finances, we document that a significant number of households that are accelerating their mortgage payments instead of saving in TDAs forgo a profitable tax arbitrage opportunity. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity or other financial constraints. Rather, the observed behavior can be attributed to a certain extent to the reluctance of many households to participate in financial markets as either lenders or borrowers. Keywords Tax arbitrages; Debt aversion; Savings choice “Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” — William Shakespeare 1. Introduction Many households are reluctant to participate in financial markets either as lenders or as borrowers. According to the 2001 Survey of Consumer Finances (SCF), nearly half of U.S. households do not own stocks and more than one-third of the households eligible for employer-sponsored retirement plans do not contribute at all to such plans. Furthermore, some households are also averse to carrying debt. At a first glance, this runs counter to stylized facts on the proliferation of consumer borrowing, especially in unsecured credit markets. Yet, a surprising number of households accelerate paydowns of their mortgage loans, which account for a larger share of their debt. We show that these choices generate substantial monetary costs for a significant number of households. This paper focuses on two of the most important financial decisions of households: retirement savings and home ownership borrowing. Many households, at one time or another, face the tradeoff between paying an extra dollar off the remaining mortgage on their house and saving that extra dollar in tax-qualified retirement accounts. In a world without frictions, paying off mortgage loans early and investing in retirement accounts would be equivalent saving decisions. In reality, however, taxes and transaction costs play a key role in the determination of the effective borrowing and lending rates. We show that, under certain conditions, it becomes a tax arbitrage to reduce mortgage prepayments and to increase contributions to tax-deferred accounts (TDAs).3 Mortgage interest payments are deductible from taxable income for households that itemize their deductions, while investment income in retirement accounts remains effectively tax-exempt.4 Hence, households earn pre-tax returns (rL) in their retirement accounts and pay after-tax rates (1 − τ)rB on their mortgage borrowing. Although the borrowing rate (rB) on the mortgage is likely higher than the investment rate (rL) for an asset with similar risk properties, we show that, as long as rL > (1 − τ) rB, households are generally better off saving in a TDA instead of prepaying their mortgage. Given the simplicity of this strategy, it is reasonable to ask whether and to what extent households recognize this tradeoff in their personal decisions. Using data from the Survey of Consumer Finances, we investigate household choices between mortgage prepayments and retirement account contributions. While it is not surprising that some households are not making the right choice, the magnitude of the overall inefficiency is striking. On the margin, at least 38% of households that prepay their mortgages could benefit from our proposed arbitrage strategy. Depending on the choice of the investment asset in the TDA, the average annual consumption gain from such a reallocation ranges between 11 and 17 cents per dollar of “mis-allocated savings” or between 252 and 385 dollars per household. In the aggregate, correcting this inefficient behavior could save U.S. households about 1.5 billion dollars per year. The finding that a significant number of households make substantial mistakes in their financial decisions echoes the conclusions of Campbell (2006). There are arguably numerous rational reasons for households either to prepay their mortgages or not to contribute to their retirement accounts—among them interest rate risks, liquidity and default risks, and credit constraints. However, we argue that none of these reasons obviates the tax arbitrage opportunity that exists for the majority of households that are prepaying without maximizing their TDA contributions. Rather, these households seem to be influenced by an aversion to participate in financial markets either as lenders or borrowers.5 Empirically, debt aversion and risk aversion explain to some extent the household preference for reducing their debt obligations in spite of incurring considerable monetary losses in the process. The propensity of debt-averse households to forgo tax arbitrages is related to the findings in Graham (2000), who shows that many corporations give up substantial tax benefits by holding too little debt. Our paper is most closely related to the recent literature on the optimal asset location choice that considers the tradeoff between savings in taxable vs. tax-deferred accounts. Dammon et al. (2004), Shoven and Sialm (2004), Poterba et al. (2004), Huang (2006), and Garlappi and Huang (2006) show theoretically that, in order to maximize the tax benefit of retirement accounts, highly taxed assets should generally be located in tax-deferred accounts and that lightly taxed assets should be located in taxable accounts. The actual behavior of individuals investing in taxable and tax-deferred accounts is analyzed by Barber and Odean (2003), Bergstresser and Poterba (2004), and Amromin (2004). These papers find that many households have significant amounts of money in both accounts and that a large proportion of them do not appear to take advantage of the potential benefits of optimal asset location. Similar to this literature, we theoretically compare the tax efficiency of two forms of savings choices, and then document actual household behavior and evaluate the extent of losses relative to the theoretical benchmark. Our main contribution is to introduce mortgage payments as an additional investment option in the tax arbitrage framework. There is also a vast literature on both retirement savings decisions6 and mortgage choices.7 Our paper contributes to this literature by linking these two strands of research and considering retirement contributions and mortgage payments as two alternative forms of household savings decisions. The paper is structured as follows. Section 2 describes the tax arbitrage strategy in detail and Section 3 discusses its robustness to a number of alternative assumptions. Section 4 describes the data and Section 5 provides summary statistics for TDA contribution and mortgage payment behavior. Section 6 calculates the cost of choosing the suboptimal saving strategy. Section 7 looks at possible explanations for why households may forgo the tax arbitrage, and Section 8 provides concluding remarks.

We characterize the optimal tradeoff between contributing an extra dollar of savings toward accelerating mortgage payments and saving that extra dollar in tax-qualified retirement accounts. We show that it is often a tax arbitrage to reduce prepayments and increase TDA contributions. We document actual household behavior using data from the Survey of Consumer Finances, and conclude that at least 38% of households who prepay their mortgages could benefit from our proposed arbitrage strategy. Depending on the choice of the investment asset in the TDA, the median gain from such a reallocation ranges between 11 and 17 cents per dollar of “mis-allocated savings”. In the aggregate, correcting this inefficient behavior could save U.S. households about 1.5 billion dollars per year. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity or other constraints, and that many households are reluctant to participate in financial markets either as borrowers or as lenders.