The Effect of Uncertain Labor Income and Social Security on Life-Cycle Portfolios
22 Pages Posted: 6 Jul 2009
Date Written: June 30, 2009
This paper examines how labor income volatility and social security benefits influence life-cycle household portfolios. We examine how much the individual saves, and where, taking into account liquid financial wealth and annuities, and stocks versus bonds. Higher labor income uncertainty and lower old-age benefits boost demand for stable income in retirement, but also when young. In addition, a declining equity glide path with age is appropriate for the worker with low income uncertainty but for the high income risk worker, equity exposure rises until retirement. We also evaluate how changes in social security benefits influence retirement risk management.
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