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

June 8, 2015


Abstract:     
Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice in private account-based alternatives to the U.S. Social Security system as an example. Via simulation, we document that choice in stock v. bond allocation and type of equity investments in private accounts leads to lower utility and greater risk of income shortfalls relative to private accounts without choice. Allowing choice increases risk for all workers. Our results suggest that private-account-based systems featuring investor choice pose substantial risk to workers beyond that induced by uncertain market outcomes. We also compare private account outcomes to currently promised Social Security benefits to demonstrate that a representative worker (who earns his cohort’s average annual salary) benefits much more from private-account alternatives — with or without choice — than do most workers. Thus, the outcomes of such a representative worker should not be used to assess population-wide benefits of private account alternatives.

Number of Pages in PDF File: 52

Keywords: Social Security, Private Retirement Accounts, Behavioral Finance

JEL Classification: H55, J25


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Date posted: October 1, 2012 ; Last revised: June 17, 2015

Suggested Citation

Ahmed, Javed and Barber, Brad M. and Odean, Terrance, Made Poorer by Choice: Worker Outcomes in Social Security vs. Private Retirement Accounts (June 8, 2015). 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, #1900
2220 Piedmont Avenue
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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