Working Paper: NBER ID: w1879
Authors: Steven F. Venti; David A. Wise
Abstract: Increasing current Individual Retirement Account (IRA) limits would lead to substantial increases in tax-deferred saving according to evidence in the paper, based on the 1983 Survey of Consumer Finances. For example, the recentTreasury Plan would increase IRA Contributions by about 30 percent. The primary focus of the paper, however, is the effect of limit increases on othersaving. How much of the IRA increase would be offset by reduction in non-tax-deferred saving? The weight of the evidence suggests that very little of the increase would be offset by reduction in other financial assets,possibly 10 to 20 percent. The estimates suggest that 45 to 55 percent of the IRA increase would be funded by reduction in expenditure for other goods and services, and about 35 percent by reduced taxes. The analysis rests on a savings decision structure recognizing the constraint that the IRA limit places on the allocation of current income; it is a constrained optimization model with the IRA limit the principle constraint. The evidence also suggests substantial variation in saving behavior among segments of the population. In addition, it appears that IRAs do not serve as a substitute fo rprivate pension plans. Thus the legislative goal of disproportionately increasing retirement saving among persons without pension plans is apparently not being realized. But the more general goal of increasing general saving is.
Keywords: Individual Retirement Accounts; Saving Behavior; Tax Policy
JEL Codes: H24; H55; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing IRA limits (F38) | Substantial increases in tax-deferred saving (H26) |
| Increasing IRA limits (F38) | Increase in IRA contributions (D14) |
| Increase in IRA contributions (D14) | Reduced expenditures on other goods and services (H59) |
| Increase in IRA contributions (D14) | Reduced taxes (H29) |
| IRA contributions (H20) | Increase in overall savings (D14) |
| IRA contributions (H20) | No substitution for private pension plans (H55) |