Optimal Portfolio Choice with Wage-Indexed Social Security / Jialun Li, Kent Smetters.

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Li, Jialun

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w17025.Publication details: Cambridge, Mass. National Bureau of Economic Research 2011.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper re-examines the classic question of how a household should optimally allocate its portfolio between risky stocks and risk-free bonds over its lifecycle. We show that allowing for the wage indexation of social security benefits fundamentally alters the optimal decisions. Moreover, the optimal allocation is close to observed empirical behavior. Households, therefore, do not appear to be making large "mistakes," as sometimes believed. In fact, traditional financial planning advice, as embedded in "target date" funds - whose enormous recent growth has been encouraged by new government policy - often leads to even relatively larger "mistakes" and welfare losses.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w17025 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w17022 The Quantification of Systemic Risk and Stability: New Methods and Measures /	nber w17023 The Role of Skill Versus Luck in Poker: Evidence from the World Series of Poker /	nber w17024 Historical Evidence on the Finance-Trade-Growth Nexus /	nber w17025 Optimal Portfolio Choice with Wage-Indexed Social Security /	nber w17026 Credit Risk and Disaster Risk /	nber w17027 The Social Cost of Near-Rational Investment /	nber w17028 Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees /	Next

May 2011.

This paper re-examines the classic question of how a household should optimally allocate its portfolio between risky stocks and risk-free bonds over its lifecycle. We show that allowing for the wage indexation of social security benefits fundamentally alters the optimal decisions. Moreover, the optimal allocation is close to observed empirical behavior. Households, therefore, do not appear to be making large "mistakes," as sometimes believed. In fact, traditional financial planning advice, as embedded in "target date" funds - whose enormous recent growth has been encouraged by new government policy - often leads to even relatively larger "mistakes" and welfare losses.