Orazio
P. Attanasio and Thomas DeLeire
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In their forthcoming article in the Economic Journal titled "The
effect of individual retirement accounts on household consumption and
national saving," researchers Orazio P. Attanasio and Thomas
DeLeire examine whether the tax incentives of the Individual
Retirement Account (IRA) program led to an increase in national saving.
They find that households financed their IRA contributions not from
a reduction in consumption, but rather from existing saving or from
planned saving. Their findings indicate that only a small fraction of
IRA contributions actually represented net additions to national saving.
These results should lead policymakers and researchers to reexamine
tax-favored saving accounts and to determine whether the additions to
household saving that are induced by tax incentives are substantial
enough to justify the loss in tax revenue from the program.
Findings
Attanasio, professor at the University College of London, and DeLeire,
assistant professor at the University of Chicago Harris School, examined
consumption data from a sample of households that had just opened an IRA
account or had an existing IRA. They tested whether the IRA program led
to an increase in national saving by determining whether newly contributing
households decreased their consumption upon entering the program. Results
suggest that there was no substitution between consumption and saving
when households began participating in the IRA program. Attanasio and
DeLeire interpret these results as providing evidence against the hypothesis
that the IRA legislation was effective in generating new saving.
While participation in the IRA program may have increased household
saving (through reduced tax liabilities), results indicate that there
was little or no increase in national saving between 1982-1986. Attanasio
and DeLeire also examine changes in the non-IRA financial assets of IRA
contributors. They find that on average, new contributors reduced their
non-IRA assets by over $1,400 compared with old contributors. Researchers
estimate that at most 9% to 20% of the IRA contributions of new contributors
represent new national saving. These figures are lower than the results
found by studies that compared IRA contributors with non-IRA contributors,
only using data on assets. The key policy question remaining is whether
a 9% or 20% increase is a large enough percentage to justify the IRA program.
The authors also examine household behavior after 1986, when eligibility
to make tax deductible IRA contributions was limited and many of the tax
advantages of the IRA program were removed. They find that there was less
reshuffling during this period. However, the results are mixed, as they
also find no evidence that these contributions constituted new saving.
Future research should examine whether tax incentives for saving are more
effective for lower income households.
Background
The U.S. national saving rate has declined dramatically over the past
10-15 years. This decline may have significant implications for the domestic
capital accumulation rate, productivity growth and the ability of households
to finance their retirements. The primary reason for the decrease in national
saving is the decline in the U.S. personal saving rate. There is little
agreement among economists as to what has caused this decline or the most
effective way to reverse this trend. One proposed method of achieving
this goal is the tax-favored saving account, such as the IRA, which allows
households to defer paying taxes on both contributions to and interest
earned from these accounts. Following the 1986 Tax Reform Act, eligibility
for IRAs was restricted, leading to a sharp decrease in IRA contributions
(from almost $50 billion in 1986 to about $12 billion in 1987).
Methodology
Most empirical studies on IRAs have focused on whether IRA contributions
before the Tax Reform Act of 1986 represented new saving or merely a reshuffling
of assets. These studies often compared contributors to non-contributors
and used data on household assets. Alternatively, Attanasio and DeLeire
compared the consumption growth of households that had recently opened
an IRA account with households that had already invested in an IRA. The
difference in the conduct of these two household groups indicates the
effect of the tax incentives for retirement saving. The researchers also
conducted a test that was based on changes in the non-IRA financial asset
balances for these two households groups. These tests also enabled them
to see whether households financed their IRA contribution from existing
saving, planned saving that would have been conducted anyway, or from
decreases in consumption.
Attanasio and DeLeire used the Consumer Expenditure Survey (CEX), a representative
sample of U.S. Households available continuously since 1980. In the CEX,
households are interviewed four times a year and information is gathered
on consumption expenditure, income, assets, household characteristics
and contributions to IRAs. The CEX is the only data set that contains
information on the consumption, IRA contributions and non-IRA financial
asset growth of a large sample of U.S. households. Thus, it is an ideal
data set on which to examine the new saving and reshuffling hypotheses.
Policy Briefs are designed to highlight key
policy implications and to broaden the dissemination of policy-related
research. These Briefs are funded by the Irving B. Harris Graduate
School of Public Policy Studies at the University of Chicago.
For more detailed information, download a copy
of an early University of Chicago Harris School working paper on this topic or
contact Jamie Rosman at (773) 702-2287 or HarrisSchool@uchicago.edu.
The Economic Journal is available online at http://www.res.org.uk/econ.html.
