Do Individual Retirement Accounts Increase Savings?

Jane Gravelle

Journal of Economic Perspectives, 1991, vol. 5, issue 2, 133-148

Abstract: Do IRAs increase savings or are they merely a windfall for otherwise well-off taxpayers? A major objective of universal IRAs was to encourage saving for retirement. A spirited debate has ensued over the use of IRA tax deductions as a means of promoting private savings. The crucial policy issue is not whether IRA contributions were substantial; they clearly were, representing about 30 percent of personal savings from 1982 to 1986. Rather the important question is the source of IRA contributions. IRAs can be financed out of 1) tax savings themselves; 2) shifting existing assets into IRAs; 3) borrowing; 4) diverting new savings into IRAs; or 5) reducing consumption. The key question is how much of IRA savings comes from reduced consumption. For overall savings to increase, private savings must increase by more than the tax savings. Conventional economic theory and evidence strongly suggests that IRAs were not effective savings incentives. The challenge to this view rests largely on studies which have appealed to a variety of "psychological" factors not normally incorporated in economic analysis. This paper reviews both types of analysis and concludes that the conventional view remains sound. Thus, a dollar devoted to deficit reduction is likely to be a safer bet for increasing savings than a dollar devoted to IRA benefits.

JEL-codes: D12 H31 J26 (search for similar items in EconPapers)
Date: 1991
Note: DOI: 10.1257/jep.5.2.133
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.2.133 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:jecper:v:5:y:1991:i:2:p:133-48

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

Journal of Economic Perspectives is currently edited by Enrico Moretti

More articles in Journal of Economic Perspectives from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().