New incentive package in individual pension system in Turkey: The move from tax deduction to state contribution

Abstract

The individual pension system was launched in Turkey in 2001 as a supplementary social security program on a voluntary basis in order to encourage people to save. The tax deduction model which used to be applied to encourage people to enter the system did not work in practice as it covered only the employees. High management fee was a disincentive factor for employees in entering the system or paying their premiums into the system. The new law which was drawn up in 2012 and put into effect in 2013 brought about new regulations in the form of reform in individual pension system. With this law, the practice of tax deduction was abolished, and it was replaced by the practise of 25% state contribution of the premium paid by an employee. In this way, the employees exempted from income tax, employees in the informal sector and housewives can also benefit from state contribution. The state contribution is increasing proportionally in line with the period of stay of an employee in the system. On the other hand, the amount which employers could deduct as an expense for their employees was increased from 10% of an employee's wage to 15%, and the administrative expenses fee and the fund management fees were reduced. It was adopted on the basis that instead of the whole amount of money in the system, only its interest (profit) should be taxed, in case the participant left the system. As soon as the new law was put into effect, there has been a dramatic rise in the number of participants entering the system and the amount of fund compared to the previous years. On the other hand state contribution matching cannot be sufficient by itself in order to increase national savings in a middle and long term. The main reasons of the inadequate savings are lack of income and poverty. On the other hand, persons have not got awareness about importance of saving. Finally, they have not got basic financial literacy information.