It's Always Hard to Save

For years, politicians have expressed concern about a relatively low savings rate in the United States. To encourage savings, they have passed laws giving tax benefits to various types of pension plans. Economists, however, have asked whether the money going into tax-advantaged plans was merely diverted from other savings and thereby not adding to the nation's total.

Three economists, James Poterba of MIT, Steven Venti of Dartmouth, and David Wise of Harvard, find that 401(k) plans do actually make a net contribution to personal savings.

The 401(k) plan is the most important savings vehicle in the current United States tax code, according to their study which was published by the National Bureau of Economic Research. These plans are available only to employees of firms that offer such plans. Deposits in 401(k) accounts are tax-deductible and the return on the contributions accrues tax-free. The contribution limit is $8,994 for 1993.

The Individual Retirement Account became popular after the Economic Recovery Act of 1981. In 1986, these plans accounted for one-fourth of personal savings. Contributions fell precipitously after the 1986 Tax Reform Act limited the IRA tax advantage for individuals with incomes above $30,000 and families with incomes above $40,000.

Contributions to 401(k) plans, on the other hand, grew rapidly in the 1980s to $46 billion in 1989. These accounts are still growing rapidly. Messrs. Poterba, Venti, and Wise find little substitution between 401(k) saving and other forms of savings, including IRAs. In 1991, families that were eligible to contribute to a 401(k) plan had several times as much in total financial wealth as families that were not eligible.