Optimal Savings for Retirement: The Role of Individual Accounts and Disaster Expectations
52 Pages Posted: 8 Jun 2016
Date Written: 2011
We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households' savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate welfare gains for high and middle income earners but welfare losses for low income earners. In the presence of rare stock market disasters, individual accounts with default portfolio allocation crowd out direct stockholding and substantially reduce welfare.
Keywords: individual retirement accounts, household portfolio choice, consumption and saving over the life-cycle
JEL Classification: E21, H55, G11
Suggested Citation: Suggested Citation