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The Effects of IRAs on Household Consumption and National Saving

Author

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  • Orazio P. Attanasio
  • Thomas DeLeire

Abstract

A major debate exists on whether expanding tax-favored savings accounts such as Individual Retirement Accounts (IRAs) will increase national savings. Much of the empirical debate on this question has centered on whether IRA contributions before the Tax Reform Act of 1986 represented new savings or merely reshuffled assets. We present a novel test between these two possibilities; we compare the consumption growth of households which had just opened an IRA account with that of households which already had invested in an IRA. We find no evidence that households financed their IRA contributions from reductions in consumption, at least in the first nine months after participation into an IRA plan starts. We also present a test based on changes in the non-IRA asset balances for these two groups of households and find evidence that households financed their IRA contributions from existing savings or from saving that would have been done anyway. While the assets based test is subject to a number of caveats, taken together our results indicate that only a small fraction of IRA contributions made by new contributors represented net additions to national saving.

Suggested Citation

  • Orazio P. Attanasio & Thomas DeLeire, 1999. "The Effects of IRAs on Household Consumption and National Saving," Working Papers 9908, Harris School of Public Policy Studies, University of Chicago.
  • Handle: RePEc:har:wpaper:9908
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    Keywords

    IRA; saving; retirement; household consumption;

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