The Illusory Effects of Saving Incentives on Saving

Abstract

American saving rates fell dramatically in the 1980s and have remained low since then. The decline in saving has raised concerns that the economy may be unable to finance investment and sustain growth and that households may not be saving adequately for retirement. One response to these concerns has been the development of special saving accounts, such as Individual Retirement Accounts, 401 (k) plans and Keogh plans. These voluntary accounts, which we refer to as "saving incentives," feature preferential tax treatment of contributions and investment earnings, annual contribution limits and penalties for early withdrawals.

The question addressed in this paper is the extent to which saving incentives have raised private and national (public plus private) saving. Contributions and investment earnings are typically tax deferred, thus reducing public saving (increasing the budget deficit) in the short run. The long-run impact on public saving is less obvious; if the incentives increase private saving, they may also increase income and tax revenue.

Keywords: saving incentives

JEL Classification: E21