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Over the past several years, we have undertaken a series of analysies of the effect of IRA and 401(k) contributions on net personal saving. Saver hetero- geneity is the key impediment to determining the saving effect of these plans We emphasize that no single method can provide sure control for all forms of heterogeneity. Taken together, however, we believe that the analyses address the key complications presented by heterogeneity. In our view, the weight of the evidence, based on the many non-parametric approaches discussed here provides strong support for the view that contributions to IRA and 401(k) represent largely new saving. Some of the evidence is directed to the IRA program, some to the 401(k) plan, and some to both plans. Several other investigators have used different methods to consider the effect of these retirement saving programs on personal saving and in some cases have reached very different conclusions from ours. Thus we have devoted particular effort to trying to reconcile the results, explaining why different approaches, sometimes based on the same data, have led to different conclusions. In some instances, we believe the limitations of the methods used by others have undermined the reliability of the results. Particular attention is devoted to a recent paper by Gale and Scholz [1994] that is widely cited as demonstrating that IRAs have no saving effect. Based on our analysis of the data used by Gale and Scholz, we find that their conclusions are inconsistent with the raw data and their formal model does not provide reliable information on the extent of substitution.

Self-directed individual retirement accounts.

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Retirement income --- Pension trusts --- Self-directed individual retirement accounts --- Planning.

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October 2000 Personal pension plans transfer investment risk to participating workers and expose them to the volatility of financial returns. Simple financial strategies lower the volatility of replacement rates but at a significant cost in terms of lower replacement rates. The purchase of variable annuities reduces the dispersion of replacement rates across generations without lowering their level. One of the strongest objections to personal pension plans is that they transfer investment risk to individual workers, who are then exposed to the vagaries of equity and bond markets. Using historical U.S. data, Alier and Vittas investigate the impact of the volatility of investment returns on replacement rates in the context of personal pension plans. They find large fluctuations in replacement rates across different cohorts of workers, if undiversified portfolios are used. They then explore a number of simple financial strategies for coping with this problem, including: Portfolio diversification. A late, gradual shift to bonds. A gradual purchase of nominal or real annuities. A purchase of variable annuities. The first three strategies lower the volatility of replacement rates, but at a significant cost in terms of lower replacement rates. The purchase of variable annuities reduces the dispersion of replacement rates across generations without lowering their level-because of the persistence of the equity premium and the fact that the volatility of equity returns is lower, the longer the holding period. Sophisticated financial engineering promises more efficient solutions to this problem, but it may not be feasible to apply it in developing countries (or in developing financial markets). Neither Alier and Vittas's approach nor the more sophisticated financial engineering solutions would be able to deal effectively with persistent deviations of investment returns from long trends. But the authors' findings suggest that overconcern about the impact on replacement rates of short-term volatility in stock markets may not be warranted. This paper-a product of Finance, Development Research Group-is part of a larger effort in the group to study pension systems and the impact of pension reform. The authors may be contacted at malier@imf.org or dvittas@worldbank.org.

Pension trusts --- Stocks --- Financial risk. --- Rate of return. --- Annuities. --- Individual retirement accounts. --- Self-directed individual retirement accounts. --- Investments. --- Prices.

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Self-employed --- Travailleurs indépendants --- Pensions --- Real property tax --- Biens réels --- Self-directed individual retirement accounts --- Épargne-retraite autogérée --- Legal status, laws, etc. --- Droit --- Law and legislation --- Impôts --- pension --- biens immobiliers --- independants --- pensioen --- onroerende goederen --- zelfstandigen --- Real estate investment --- Immeubles --- Investissements