Housing and Pensions: Complements or Substitutes in the Portfolio Allocation?
58 Pages Posted: 8 Apr 2022 Last revised: 21 Aug 2023
Date Written: March 29, 2022
Abstract
We study the relation between retirement savings and housing using a life cycle model of consumption and portfolio choice with risky earnings, lumpy housing with collateralized borrowing, and financial assets inside and outside pension plans. We consistently find complementarity from pensions to housing, and substitutability in reverse. The mechanism behind this asymmetry, and especially how it unfolds across genders, stems from behavioral and housing frictions that jointly drive the timing of savings: incentivizing pension savings boosts homeownership in anticipation of a prosperous retirement, while more attractive housing absorbs pension investments. Decomposing the gender differential in lifetime savings, we show that earnings inequality and preferences drive 64.2\% of the wealth gap, behavioral frictions explain another 33.5\%, and housing adjustment costs, that affect males and females differently, account for the rest.
Keywords: lifecycle savings, portfolio choice, pensions, housing, method of moments
JEL Classification: H8, J26, J32
Suggested Citation: Suggested Citation