The Power of Financial Incentives versus the Power of Suggestion for Individual Pension: Are Financial Incentives or Automatic Enrollment Policies More Effective?

Abstract

This study investigates and compares the impacts of two important reforms in retirement savings-matching contribution and automatic enrollment-on participation in the individual pension system (IPS) in Turkey by using a dataset containing information about over 40 million pension contracts for the period of 2004-2021. Unlike the automatic enrollment system (AES), the state matching contribution policy imposes a burden on the state's budget; understanding the relative effectiveness of the two policies can help protect the public budget from such burdens, especially by taking individual attitudes into account in future policy recommendations. Our estimations indicate that both reforms led to an overall increase in participation. However, the AES is not efficient at encouraging participants to make an active decision on plan characteristics, such as portfolio choices. We also evaluate the effects of the two reforms on IPS participation among different demographic groups. We find that males and married individuals are more responsive to matching contributions, and education levels seem to be closely related with IPS participation. Participants are also sensitive to both the returns of pension funds and alternative investment instruments. All the findings imply that individuals must be encouraged to recognize the need for effective financial preparation in their post-retirement lives. To accomplish this, policymakers could utilize a comprehensive informative campaign and workplace seminars about both the system as a whole and the returns, and they could improve the plan characteristics to be compatible with the needs of individuals before retirement as well as after.