TY  - JOUR
AU  - Campbell,John Y.
AU  - Cocco,Joao F.
AU  - Gomes,Francisco J.
AU  - Maenhout,Pascal J.
TI  - Investing Retirement Wealth:  A Life-Cycle Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7029
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7029
L1  - http://www.nber.org/papers/w7029.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Joao Cocco
London Business School
Regent's Park
London NW1 4SA, UK
E-Mail: jcocco@london.edu

Francisco Gomes
Finance Department
London Business School
Sussex Place
London NW1 4SA
UK
E-Mail: fgomes@london.edu

Pascal Maenhout
INSEAD
Boulevard de Constance
77305 Fontainebleau Cedex
FRANCE
Tel: 33 1 60 72 44 83
Fax: 33 1 60 72 40 45
E-Mail: pascal.maenhout@insead.edu
M1  - published as Lazare Teper. "The Effect of Multi-Industry Employment on the Industrial Distribution of Wages," in Conference on Research in Income and Wealth, "An Appraisal of the 1950 Census Income Data" Princeton University Press (1958)

AB  - If household portfolios are constrained by borrowing and short-sales restrictions asset markets, then alternative retirement savings systems may affect household welfare by relaxing these constraints.  This paper uses a calibrated partial-equilibrium model of optimal life-cycle portfolio choice to explore the empirical relevance of these issues.  In a benchmark case, we find ex-ante welfare gains equivalent to a 3.7% increase in consumption from the investment of half of retirement wealth in the equity market.  The main channel through which these gains are realized is that the higher average return on equities permits a lower Social Security tax rate on younger households, which helps households smooth their consumption over the life cycle.  There is a smaller welfare gain of 0.5% of consumption when Social Security tax rates are held constant.  We also find that realistic heterogeneity of risk aversion and labor income risk can strongly affect optimal portfolio choice over the life cycle, which provides one argument for a privatized Social Security system with an element of personal portfolio choice.
ER  -