Optimal Portfolio Choice with Wage-Indexed Social Security

37 Pages Posted: 9 May 2011

See all articles by Jialun Li

Jialun Li

affiliation not provided to SSRN

Kent A. Smetters

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: May 2011

Abstract

This 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.

Suggested Citation

Li, Jialun and Smetters, Kent, Optimal Portfolio Choice with Wage-Indexed Social Security (May 2011). NBER Working Paper No. w17025, Available at SSRN: https://ssrn.com/abstract=1833162

Jialun Li (Contact Author)

affiliation not provided to SSRN ( email )

Kent Smetters

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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