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NBER Working Papers and Publications
|January 2001||Investing Retirement Wealth: A Life-Cycle Model|
with John Y. Campbell, João F. Cocco, Francisco J. Gomes
in Risk Aspects of Investment-Based Social Security Reform, John Y. Campbell and Martin Feldstein, editors
|March 1999||Investing Retirement Wealth: A Life-Cycle Model|
with John Y. Campbell, Joao F. Cocco, Francisco J. Gomes: w7029
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 cons...
Risk Assets of Investment-Based Social Security Reform, Feldstein, Martin,and John Y. Campbell, eds., NBER, Chicago: The University of Chicago Press 2000, forthcoming.