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Optimal Savings with Taxable and Tax-Deferred Accounts

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  • Francisco Gomes

    (London Business School)

  • Alexander Michaelides

    (London School of Economics)

  • Valery Polkovnichenko

    (University of Texas, Dallas)

Abstract

We solve and estimate a life-cycle model with earnings risk and liquidity constraints in the presence of tax-deferred retirement accounts (TDAs). We explicitly consider two very different types of households (with TDAs): direct and indirect stockholders. The latter hold stocks only through TDAs and, consistent with the data, save considerably less than the former, who hold stocks both inside and outside these accounts. We find that TDAs promote higher wealth accumulation but only marginally higher net savings. Consumption increases mostly during retirement, as desired, but the effect is largest for those households with higher savings rates already. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.01.004
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 4 (October)
Pages: 718-735

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Handle: RePEc:red:issued:07-198

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Related research

Keywords: Tax-deferred accounts; Retirement savings; Liquidity constraints; Portfolio choice; Uninsurable earnings risk;

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References

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  1. Eric M. Engen & William G. Gale & John Karl Scholz, 1996. "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 113-138, Fall.
  2. B. Douglas Bernheim, 1999. "Taxation and Saving," Working Papers 99007, Stanford University, Department of Economics.
  3. Gomes, Francisco J & Michaelides, Alexander, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," CEPR Discussion Papers 4853, C.E.P.R. Discussion Papers.
  4. James M. Poterba & Steven F. Venti & David A. Wise, 1993. "Do 401(k) Contributions Crowd Out Other Persoanl Saving?," NBER Working Papers 4391, National Bureau of Economic Research, Inc.
  5. John Y. Campbell & João F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 2001. "Investing Retirement Wealth: A Life-Cycle Model," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 439-482 National Bureau of Economic Research, Inc.
  6. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  7. Sule Alan, 2006. "Entry Costs and Stock Market Participation over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 588-611, October.
  8. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  9. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-53, July.
  10. Mariacristina De Nardi & Eric French & John Bailey Jones, 2006. "Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles," 2006 Meeting Papers 46, Society for Economic Dynamics.
  11. Robert M. Dammon & Chester S. Spatt & Harold H. Zhang, 2004. "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing," Journal of Finance, American Finance Association, vol. 59(3), pages 999-1037, 06.
  12. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 91-112, Fall.
  13. Garlappi, Lorenzo & Huang, Jennifer, 2006. "Are stocks desirable in tax-deferred accounts?," Journal of Public Economics, Elsevier, vol. 90(12), pages 2257-2283, December.
  14. Alexander Michaelides & Francisco J. Gomes, 2005. "Optimal life cycle asset allocation : understanding the empirical evidence," LSE Research Online Documents on Economics 193, London School of Economics and Political Science, LSE Library.
  15. Monica Paiella, 2007. "The forgone gains of incomplete portfolios," Temi di discussione (Economic working papers) 625, Bank of Italy, Economic Research and International Relations Area.
  16. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  17. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.
  18. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-52, July.
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Citations

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Cited by:
  1. Marekwica, Marcel & Schaefer, Alexander & Sebastian, Steffen, 2013. "Life cycle asset allocation in the presence of housing and tax-deferred investing," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1110-1125.
  2. Jonathan Huntley & Valentina Michelangeli, 2011. "Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model? (Working Paper 2011-02)," Working Papers 41581, Congressional Budget Office.
  3. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, vol. 157(4), pages 359-416, December.
  4. Inkmann, Joachim & Lopes, Paula & Michaelides, Alexander, 2010. "How Deep is the Annuity Market Participation Puzzle?," CEPR Discussion Papers 7940, C.E.P.R. Discussion Papers.
  5. Marco Angrisani & Michael D. Hurd & Erik Meijer, 2012. "Investment Decisions in Retirement: The Role of Subjective Expectations," Working Papers wp274, University of Michigan, Michigan Retirement Research Center.
  6. Le Blanc, Julia & Scholl, Almuth, 2011. "Optimal savings for retirement: The role of individual accounts and disaster expectations," Discussion Paper Series 1: Economic Studies 2011,33, Deutsche Bundesbank, Research Centre.
  7. Marekwica, Marcel, 2012. "Optimal tax-timing and asset allocation when tax rebates on capital losses are limited," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2048-2063.
  8. Zhou, Jie, 2012. "Life-cycle stock market participation in taxable and tax-deferred accounts," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1814-1829.
  9. Katarzyna Romaniuk, 2013. "Pension fund taxation and risk-taking: should we switch from the EET to the TEE regime?," Annals of Finance, Springer, vol. 9(4), pages 573-588, November.
  10. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2217-2240.
  11. Kosuke Aoki, 2010. "Inflation, Money Demand and Portfolio Choice," 2010 Meeting Papers 750, Society for Economic Dynamics.
  12. Roine Vestman, 2013. "Limited Stock Market Participation Among Renters and Home Owners," 2013 Meeting Papers 549, Society for Economic Dynamics.

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