Optimal Portfolio Choice with Wage-Indexed Social Security

Jialun Li and Kent Smetters ()

No 17025, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G11 H0 (search for similar items in EconPapers)
Date: 2011-05
Note: AG AP PE
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Citations: View citations in EconPapers (6)

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