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

Posted: 11 May 2013

See all articles by Javed Ahmed

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: February 15, 2013

Abstract

Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the Social Security system as an example. Comparing a privatized alternative with the current system via simulation, we document that choice in both equity allocation and equity composition lead to increased income inequality and risk of shortfalls relative to currently promised benefits. While private accounts disproportionately increase shortfall risk for low-income workers, allowing choice increases risk for all workers (even with high return outcomes). Our results suggest that restricted choice should be a central component of private-account-based systems.

Keywords: Social Security, private retirement accounts, behavioral finance

JEL Classification: D14, G11, H55

Suggested Citation

Ahmed, Javed and Barber, Brad M. and Odean, Terrance, Made Poorer by Choice: Worker Outcomes in Social Security v. Private Retirement Accounts (February 15, 2013). Available at SSRN: https://ssrn.com/abstract=2262747 or http://dx.doi.org/10.2139/ssrn.2262747

Javed Ahmed (Contact Author)

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

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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