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The welter of offerings can leave many consumers befuddled. IRA ads often bristle with hype or technical jargon. Says Donald Underwood, vice president of retirement planning at Merrill Lynch, which holds 1.4 million IRAs: "Consumers are overwhelmed by the variety because there's a lot of smoke out there. They have to do their homework."
While IRAs have hit it big with consumers, it is less clear whether they have accomplished their broader goals. One of those purposes was to boost the U.S. savings rate, which would make more capital available for expanding the country's industrial base. Yet consumers saved only 4.6% of their disposable personal income in 1985, compared with 7.5% in 1981, the year before IRAs were expanded. Economists have not despaired, though. "On balance, the IRAs have worked well. Maybe the savings rate would have dropped even more without them," says Robert Ortner, chief economist at the Commerce Department. Experts generally believe that most initial IRA contributions consisted of money that consumers had already saved anyway. But after that cash is tucked away, the IRA program is expected eventually to stimulate more and more new savings.
The other primary goal for the IRA law was to encourage citizens to supplement Social Security with their own portable pensions. While huge amounts of cash have indeed been moved into such accounts, the IRA program is expected to cost the Government about $13 billion in lost tax revenue this year. Moreover, some critics point out that the taxpayers who most often take advantage of IRAs are the ones who need it least: the middle and upper class. Low-income citizens seldom have the spare cash to invest. To the extent that the IRA program takes pressure off legislators to bolster Social Security payments, it may work against the interests of low-income citizens in the decades ahead.
IRA-tending consumers will want to keep an eye on Washington for possible changes in the rules. President Reagan has proposed increasing the top IRA contribution for nonworking spouses from $250 to the $2,000 that is currently allowed for working people. Many legislators oppose that idea, because they believe it would benefit mostly the wealthy. In another development, the House passed a tax-reform bill last November that included a provision to discourage early IRA withdrawals by increasing the penalty from 10% to 15%. That measure could stand a chance, since the Senate Finance Committee is considering the same step.
Despite potential adjustments in the law, the IRA momentum is unlikely to diminish in the near future. With a certain amount of wonder, Economist Johnson of the Investment Company Institute declares that "many consumers are saving for an IRA contribution by forgoing weekend movies or a spring vacation or that brand-new suit." U.S. consumers, usually noted for their spending, now appear to have saving on their minds, at least until April 15.
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