Suppose that the government seeks to raise savings and is considering expanding the Individual Retirement Accounts (IRAs) to do this. US evidence suggests that IRA holders save more than non-IRA holders.

a. How can the theory explain that IRAs increase savings? What are the income effects and the substitution effects? What about the replacement effect of substituting IRAs for savings already done outside the program?

b. Is the evidence-based prediction that IRAs increase savings necessarily correct? Why or why not? How might the distinction between private and national savings affect the analysis?