Abstract

http://ssrn.com/abstract=2154628
 


 



Made Poorer by Choice: Worker Outcomes in Social Security vs. Private Retirement Accounts


Javed Ahmed


Board of Governors of the Federal Reserve System

Brad M. Barber


University of California, Davis

Terrance Odean


University of California, Berkeley - Haas School of Business

February 17, 2014


Abstract:     
Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the U.S. Social Security system as an example. Comparing a private account-based 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 private-account-based systems featuring investor choice pose substantial risk to social welfare beyond that induced by uncertain market outcomes. We also find that a representative worker (who earns his cohort’s average annual salary) benefits much more from a private-account alternative, than do most workers. Thus, the welfare of such a representative worker should not be used to assess population-wide benefits of private account alternatives.

Number of Pages in PDF File: 55

Keywords: Social Security, Private Retirement Accounts, Behavioral Finance

JEL Classification: H55, J25

working papers series


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Date posted: October 1, 2012 ; Last revised: February 18, 2014

Suggested Citation

Ahmed, Javed and Barber, Brad M. and Odean, Terrance, Made Poorer by Choice: Worker Outcomes in Social Security vs. Private Retirement Accounts (February 17, 2014). Available at SSRN: http://ssrn.com/abstract=2154628 or http://dx.doi.org/10.2139/ssrn.2154628

Contact Information

Javed Ahmed
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-912-4649 (Phone)
202-452-5210 (Fax)
HOME PAGE: http://www.federalreserve.gov/research/staff/ahmedjavedi.htm
Brad M. Barber
University of California, Davis ( email )
Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)
Terrance Odean (Contact Author)
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)
HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html
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