Iras and Saving

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.