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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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Executive summary

Governments have long used financial incentives to promote savings for retirement. Financial incentives are meant to encourage participation in retirement savings plans and boost overall retirement income by making private savings, as a complement to public savings, more attractive. Historically, tax incentives have been the dominant type of incentive, providing favourable tax treatment to retirement savings as compared to other types of savings. More recently, new types of financial incentives have emerged, which are not linked to the tax system. These non-tax incentives include matching contributions, where governments match the employee’s contribution to the pension account, and fixed nominal subsidies paid into the pension account of eligible individuals.

English

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