The effect of individual retirement accounts on household

							 ‘The effect of individual retirement
accounts on household consumption
       and national savings’


Orazio P. Attanasio & Thomas DeLeire


                            Karolina Sciborska
                                                 1
 Does IRA programme increase national
 saving?

 Do IRA contribution represent new savings or
 reshuffle assets?

 Will expanding tax-favoured savings such as
 IRA increase national savings?



                                                 2
   Problem:
    - decline in US national savings rate
     Implications:
      • Domestic capital accumulation rate
      • Productivity growth
      • HH retirement financing


   Reason:
    - decline in personal savings rate


   Proposal:
    - tax-favoured savings account – IRA & 401(k)


                                                    3
   Effectiveness of tax-favoured savings accounts

                       expensive policies!

    Level of personal savings > lost tax revenue

    Financing IRA contributions:
    - non-IRA financial asset balances
    - non-IRA saving
    - consumption decrease

   Hypothesis: participation in IRA programme is an
indicator of high propensity to save


    Note! tax incentives merely represent a transfer
from taxpayers to savers
                                                       4
 Data:
   Consumer Expenditure Survey (CEX) – panel of
   consumption


 Literature:
   - US examine IRA and 401(k) programme
   - UK examine Personal Equity Plans (PEPs) and
   Tax Exempt Special Savings Accounts (TESSAs)




                                                   5
 The effect of the tax incentives for retirement saving
estimated from the difference in individuals behaviour:
       - new & continuing contributors of IRA


   HH consumption
       New contributors should reduce consumption


   Changes in financial assets
       New contributors should have smaller increase in
non-IRA assets than continuing contributors


                                                           6
 Results:

1. Consumer who start participating in IRA plan reshuffle
   assets and only after some time reduce consumption

2. IRA contributions can be financed in part from
   reduced tax liabilities

Note! This saving would be financed completely by a
   reduction in government revenues

        National saving would not increase


                                                       7
3. New contributors have slower growth in non-IRA
assets than continuing contributors – the difference in
the rate of growth on average 7%

4. The difference in the changes in non-IRA financial
assets for new and continuing contributors are quite
large relative to the average and median real IRA
contribution

 this indicates reshuffling behaviour by new
contributors



                                                          8
 Conclusions:



• No evidence that HH financed their IRA
  contributions from reductions in consumption

• IRA contributions financed from existing savings

• 9% of IRA contributions represented net
  additions to national saving


                                                     9
‘Bulls, Bears, and Retirement Behavior’


   Courtney C. Coile and Phillip B. Levine


             NBER, September 2004




                                             10
 Problem:


-after record gains in the late 1990s the US stock market
dropped


-in a year after the market peak, in March 2000, the
benchmark S&P 500 Index lost over one quarter of its value
and the NASDAQ Composite Index lost over 60%


- by October 2002, the S&P 500 had fallen by 50% from its
peak and the NASDAQ had fallen by 80%


                                                             11
Note! Decline occurred when more Americans were
exposed to the stock market than ever before, often through
the participation in their pension plans:


   • 79% of full-time workers with a pension had a 401(k)
   plan or other type of DC plan in 1998 (40% in 1983)
   /Friedberg and Webb (2003)/


   • 52% of HH held some stock in 1998 (36% in 1989)
   /Poterba (2001)/



                                                            12
 Would the stock market drop force many older
workers to postpone retirement?



Note! In fact, 21% of those who had lost money in stock
and not yet retired reported that they have postponed
retirement
(AARP study of 50 to 70 year old stock holders, 2002)



                                                          13
 Hypothesis: boom and bust in the stock market over
the past decade had the potential to influence the
retirement behavior of older workers


 Analysis:
   - the impact of wealth shocks on labor supply
   - the relationship between stock market performance
   and retirement behavior




                                                         14
 Data:

  • Health and Retirement Study (HRS)

    - 1992 - 2002 /7,500 HH/

  • Current Population Survey (CPS)

    - March 1981 - 2003 /50,000HH/

  • Survey of Consumer Finances (SCF)

    - 1992, 1995, and 1998 /4,500HH/



                                        15
    Analysis of wealth holdings of older households


    Simulation of the labor supply response among
    stockholders necessary to generate observed patterns
    in retirement


    Comparison of the retirement and labor force re-entry
    patterns over time of those more and less exposed to
    the market, using the unique pattern of boom and bust
    and variation in stock exposure


                                                            16
 Results:


  •   only few HH have crucial stock holdings and they would
  have to be extremely responsive to market fluctuations to
  explain observed labor force patterns
  •   any difference in behavior that took place during the
  boom should be reversed during the bust


  Note! Only little support for an impact of the boom and bust
  on retirement and labor force re-entry


                                                              17
 Conclusions:



  •   no evidence that changes in the stock market drive
  aggregate trends in labor supply



  •   drop in wealth from the market bust in 2000 was
  reflected in changes in consumption and other behaviors
  than in changes in labor supply of near-retirement-age
  workers or recent retirees


                                                           18