The Effect of Individual Retirement Accounts on Household Consumption and National Saving*

A major debate exists on whether expanding tax-favoured savings accounts such as Individual Retirement Accounts (IRAs) will increase national savings. Much of the empirical debate has centred on whether IRA contributions before the Tax Reform Act of 1986 represented new savings or merely reshuffled assets. We find no evidence that households financed their IRA contributions from reductions in consumption, at least initially. We find evidence that households financed their IRA contributions from existing savings or from saving that would have been done anyway. Our results indicate that, at most, 9% of IRA contributions represented net additions to national saving.