Eggs and Baskets: Lifecycle Portfolio Dynamics
60 Pages Posted: 8 Apr 2022 Last revised: 21 Aug 2023
Date Written: March 29, 2022
Housing and pension wealth are two major contributors to the quality of old-age provision. Here we study the interplay between these two asset classes using the impact of changes in saving incentives on wealth accumulation across the lifetime. To do so, we build and estimate a dynamic lifecycle model of saving and portfolio choice featuring risky earnings, lumpy housing with collateralized borrowing, and financial assets inside and outside pension plans. Through counterfactual simulations, we find complementarity from pensions to housing, and a substitutability from housing to pensions. Specifically, incentivizing pension savings increases housing, with homeownership and mortgaging occurring earlier and at higher levels, in anticipation of a prosperous retirement. In contrast, more attractive housing reduces liquidity and displaces pension savings, while tightening collateral constraints reduces both pension and housing investments. The mechanism behind this asymmetry, and especially how it unfolds across genders, stems from behavioral and housing frictions along with the partial liquidity offered by collateralized borrowing that jointly determine the timing of wealth accumulation. In this respect, we show that: (i) changes to pension plan architecture can significantly narrow the gender gap in wealth, (ii) better pension and housing conditions increase overall wealth without any further moder- ating effects on gender-wealth inequality, and (iii) higher market risk and tighter borrowing constraints widen the gap.
Keywords: lifecycle savings, portfolio choice, pensions, housing, method of moments
JEL Classification: H8, J26, J32
Suggested Citation: Suggested Citation