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

39 Pages Posted: 1 Oct 2012 Last revised: 7 Jul 2016

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

Date Written: July 5, 2016

Abstract

Can the freedom to choose how retirement funds are invested leave workers worse off? 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. We also compare private account outcomes to currently promised Social Security benefits to demonstrate that a representative worker (an average wage earner) benefits more from private-account alternatives—with or without choice—than do most workers. Thus, representative worker outcome should not be used to assess population-wide benefits of private account alternatives.

Keywords: Social Security, Private Retirement Accounts, Behavioral Finance

JEL Classification: H55, J25

Suggested Citation

Ahmed, Javed and Barber, Brad M. and Odean, Terrance, Made Poorer by Choice: Worker Outcomes in Social Security vs. Private Retirement Accounts (July 5, 2016). Available at SSRN: https://ssrn.com/abstract=2154628 or http://dx.doi.org/10.2139/ssrn.2154628

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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