Optimal Portfolio Choice with Wage-Indexed Social Security,
NBER Working Paper No. 17025 This paper re-examines the classic question of how a household should optimally allocate its portfolio between risky stocks and risk-free bonds over its lifecycle. We show that allowing for the wage indexation of social security benefits fundamentally alters the optimal decisions. Moreover, the optimal allocation is close to observed empirical behavior. Households, therefore, do not appear to be making large "mistakes," as sometimes believed. In fact, traditional financial planning advice, as embedded in "target date" funds - whose enormous recent growth has been encouraged by new government policy - often leads to even relatively larger "mistakes" and welfare losses. This paper is available as PDF (315 K) or via email
Machine-readable bibliographic record - MARC, RIS, BibTeX Document Object Identifier (DOI): 10.3386/w17025 Users who downloaded this paper also downloaded* these:
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