TY  - JOUR
AU  - Li,Jialun
AU  - Smetters,Kent
TI  - Optimal Portfolio Choice with Wage-Indexed Social Security
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17025
PY  - 2011
Y2  - May 2011
UR  - http://www.nber.org/papers/w17025
L1  - http://www.nber.org/papers/w17025.pdf
N1  - Author contact info:
Jialun Li
3620 Locust Walk
Philadelphia, PA 19104
E-Mail: jialunli@wharton.upenn.edu

Kent Smetters
University of Pennsylvania
SH-DH 3303
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-9811
Fax: 215/898-0310
E-Mail: smetters@wharton.upenn.edu
AB  - 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.
ER  -