Should the Poor Own Stocks? The Role of Social Security

Ying Chen, Kent Smetters

NBER Retirement Research Center Paper No. NB 07-08
Issued in August 2008

This paper examines how households should optimally allocate their portfolio choices between stocks and bonds in a lifecycle model where they face uninsurable wage shocks and an uncertain lifetime. We include a progressive social security system that is wage indexed before retirement, as in many pay-as-you-go systems including the United States. Social security benefits are correlated with stock returns at a low frequency that is relevant for lifecycle retirement planning. We show that this model is able to more closely replicate the key stylized facts of portfolio choice relative to alternative specifications.

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Acknowledgments