The Effects of Tax-Based Saving Incentives on Saving and Wealth

81 Pages Posted: 3 Dec 1996 Last revised: 4 Oct 2010

See all articles by Eric M. Engen

Eric M. Engen

Federal Reserve Board

William G. Gale

Brookings Institution

John Karl Scholz

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 1996

Abstract

This paper evaluates research examining the effects of tax-based saving incentives on private and national saving. Several" factors make this an unusually difficult problem. First, households that participate in, or are eligible for, saving incentive plans have systematically stronger tastes for saving than other households. Second, the data indicate that households with saving incentives have taken on more debt than other households. Third, significant changes in the 1980s in financial markets, pensions, social security, and nonfinancial assets interacted with the expansion of saving incentives. Fourth, saving incentive accounts represent pre-tax balances, whereas conventional taxable accounts represent post-tax balances. Fifth, the fact that employer contributions to saving incentive plans are a part of total employee compensation is typically ignored. A major theme of this paper is that analyses that ignore these issues overstate the impact of saving incentives on saving. We show that accounting for these factors largely or completely eliminates the estimated positive impact of saving incentives on saving found in the literature. Thus, we conclude that little if any of the overall contributions to existing saving incentives have raised private or national saving. *Portions of this article were published in the JEP, 1996, under title of "The Illusory Effects of Saving Incentives on Saving."

Suggested Citation

Engen, Eric M. and Gale, William G. and Scholz, John Karl, The Effects of Tax-Based Saving Incentives on Saving and Wealth (September 1996). NBER Working Paper No. w5759. Available at SSRN: https://ssrn.com/abstract=3599

Eric M. Engen (Contact Author)

Federal Reserve Board ( email )

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William G. Gale

Brookings Institution ( email )

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John Karl Scholz

University of Wisconsin - Madison - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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