DO IRAS AND KEOGHS INCREASE SAVING?

Abstract

Government retirement saving policies influence household saving. This paper considers the impact on household saving of tax-favored individual retirement savings plans—Keogh accounts and Individual Retirement Accounts (IRAs). One presumption behind the change in policy toward a more liberalized tax treatment of individual retirement saving is that higher net rates of return will encourage saving. Here, the focus is on the extent to which access to higher net rates of return afforded by IRAs and Keoghs leads to increased saving. As a basis for analysis, an extended life-cycle model of saving is used; the model is estimated using cross-section data. The results indicate that contributions to IRAs and Keogh plans stimulate saving and that the increase depends positively on the marginal tax rate, implying an interest sensitivity of saving.

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