Government Policy and Personal Retirement Saving

Abstract

Incentives to save for retirement have been an important component of government tax policy since the Revenue Act of 1942 made employer pension contributions tax-deductible. Since that time, pension funds have grown enormously. Private firm pension assets increased from $13 billion in 1950 to $1,836 billion in 1989.! But only about half of the work force is covered by a pension plan and thus benefit from this inducement to employers to save for their employees' retirement. To address this inequity and to provide a retirement saving incentive for employees not covered by pension plans, the Individual Retirement Account (IRA) was introduced in 1974. Under this plan, employees without an employer provided pension plan could put up to $1,500 each year in an IRA account. The contribution was tax-deductible and the return on the bal ance accumulated tax free. Taxes were paid on withdrawal. The non We are grateful to Art Kennickell for providing a cleaned version of the SCF data set (Avery and Kennickell, 1988).