Optimal Portfolio Choice with Wage-Indexed Social Security
AbstractThis 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17025.
Date of creation: May 2011
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Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- H0 - Public Economics - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-14 (All new papers)
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