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Financial Incentives and Retirement Savings

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Are tax incentives the best way to encourage people to save for retirement? This publication assesses whether countries can improve the design of financial incentives to promote savings for retirement. After describing how different countries design financial incentives to promote savings for retirement in funded pensions, the study calculates the overall tax advantage that individuals may benefit from as a result of those incentives when saving for retirement. It then examines the fiscal cost of those incentives and their effectiveness in increasing retirement savings, and looks into alternative approaches to designing financial incentives. The study ends with policy guidelines on how to improve the design of financial incentives to promote savings for retirement, highlighting that depending on the policy objective certain designs of tax incentives or non-tax incentives may be more appropriate.

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Assessing alternative approaches to designing financial incentives to promote savings for retirement

This chapter first describes the main features of the most common approach currently used by countries to promote savings for retirement, which taxes only pension benefits and exempts contributions and returns on investment. The chapter then assesses alternative approaches to designing financial incentives using a theoretical framework to see whether they would improve on the current main approach. The analysis measures improvement through the tax advantage that people may get over their lifetime when saving for retirement, and through the fiscal cost for the treasury.

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