Life cycle analysis of savings accounts with matching contributions

Abstract

In this study, we examined the macroeconomic effects and welfare implications of the new voluntary saving accounts enacted in Turkey. The most salient features of these accounts include tax advantages, government matching contributions, and the fees levied on returns and contributions. Using an overlapping generations model, we demonstrated that the new saving accounts with no fees eventually raise the capital stock by 29.7% and the net saving rate by 0.50 percentage points. Our long-run analysis yielded two other noteworthy results. First, matching contributions generate stronger saving incentives than the tax advantages. Second, the fees implemented on these accounts curtail higher contributions and hence should be eliminated. The transition analysis revealed that the low- and medium-income young individuals benefit the most during the implementation phase of the plan. In contrast, the old-age high-income group incurred a loss. Hence, a government, with long-run commitment to the current system, can achieve a substantial increase in the capital stock and promote the well-being of the least advantaged group, that is, young and low-income individuals in the economy. • Life-cycle general equilibrium analysis of voluntary savings accounts. • Key features are the match on contributions, tax advantages, and fees collected. • Analyze the welfare effects in the long run and during the transition. • The match on contributions increases savings and capital stock. • The welfare of the young and low-income groups improve during transition.