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Made poorer by choice: worker outcomes in Social Security v. private retirement accounts

  • Javed I. Ahmed
  • Brad M. Barber
  • Terrance Odean
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    Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the Social Security system as an example. Comparing a privatized alternative with the current system via simulation, we document that choice in both equity allocation and equity composition lead to increased income inequality and risk of shortfalls relative to currently promised benefits. While private accounts disproportionately increase shortfall risk for low-income workers, allowing choice increases risk for all workers (even with high return outcomes). Our results suggest that restricted choice should be a central component of private-account-based systems.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-23.

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    Date of creation: 2013
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    Handle: RePEc:fip:fedgfe:2013-23
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