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IRAs and Saving

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1879.

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Date of creation: Mar 1986
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Publication status: published as Venti, Steven and David A. Wise. "IRAs and Saving," The Effects of Taxationon Capital Accumulation, ed. by Martin Feldstein. Chicago: UCP, 1987.
Handle: RePEc:nbr:nberwo:1879

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  1. Michael D. Hurd & John B. Shoven, 1983. "The Distributional Impact of Social Security," NBER Working Papers 1155, National Bureau of Economic Research, Inc.
  2. Obstfeld, Maurice, 1984. "Multiple Stable Equilibria in an Optimizing Perfect-Foresight Model," Econometrica, Econometric Society, Econometric Society, vol. 52(1), pages 223-28, January.
  3. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 83-103, February.
  4. Blackorby, Charles & Boyce, Richard & Russell, R Robert, 1978. "Estimation of Demand Systems Generated by the Gorman Polar Form: A Generalization of the S-Branch Utility Tree," Econometrica, Econometric Society, Econometric Society, vol. 46(2), pages 345-63, March.
  5. B. Douglas Bernheim, 1987. "Dissaving After Retirement: Testing the Pure Life Cycle Hypothesis," NBER Working Papers 1409, National Bureau of Economic Research, Inc.
  6. Hausman, Jerry & Ruud, Paul, 1984. "Family Labor Supply with Taxes," American Economic Review, American Economic Association, American Economic Association, vol. 74(2), pages 242-48, May.
  7. Steven F. Venti & David A. Wise, 1988. "The Determinants of IRA Contributions and the Effect of Limit Changes," NBER Chapters, National Bureau of Economic Research, Inc, in: Pensions in the U.S. Economy, pages 9-52 National Bureau of Economic Research, Inc.
  8. Brown, Murray & Heien, Dale M, 1972. "The S-Branch Utility Tree: A Generalization of the Linear Expenditure System," Econometrica, Econometric Society, Econometric Society, vol. 40(4), pages 737-47, July.
  9. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, Elsevier, vol. 23(1-2), pages 81-114.
  10. Obstfeld, Maurice, 1985. "The Capital Inflows Problem Revisited: A Stylized Model of Southern Cone Disinflation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 605-25, October.
  11. Mervyn A. King & Jonathan I. Leape, 1984. "Wealth and Portfolio Composition: Theory and Evidence," NBER Working Papers 1468, National Bureau of Economic Research, Inc.
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