The Illusory Effects of Saving Incentives on Saving

Abstract

American rates fell dramatically in the 1980s and have remained low since then. The decline in has raised concerns that the economy may be unable to finance investment and sustain growth and that households may not be adequately for retirement. One response to these concerns has been the development of special 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 incentives have raised private and national (public plus private) saving. Contributions and investment earnings are typically tax deferred, thus reducing public (increasing the budget deficit) in the short run. The long-run impact on public is less obvious; if the incentives increase private saving, they may also increase income and tax revenue.