Made Poorer by Choice: Worker Outcomes in Social Security vs. Private Retirement Accounts
39 Pages
Posted: 1 Oct 2012
Last revised: 7 Jul 2016
Board of Governors of the Federal Reserve System
University of California, Davis
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:
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
