Tax-Deferred Accounts, Constrained Choice and Estimation of Individual Saving

Abstract

The paper analyzes the effect of tax-deferred individual retirement accounts (IRAs) in the United States on net individual saving. The results are based on a model of constrained optimization with the limit on tax-deferred saving the principle constraint. The estimates suggest that contributions to IRAs represent substantial net saving increases. Were the IRA limit to be increased, only about 10 to 20% of resulting increase in IRA contributions would be taken from other savings. About 50% would come from reduced consumption and about 35% from reduced taxes.