The Effect of Uncertain Labor Income and Social Security on Life-cycle Portfolios
This paper examines how labor income volatility and social security benefits can influence lifecycle household portfolios. We examine how much the individual optimally saves and where, taking into account liquid financial wealth and annuities, and stocks as well as bonds. Higher labor income uncertainty and lower old-age benefits boost demand for stable income in retirement, but also when young. In addition, a declining equity glide path with age is appropriate for the worker with low income uncertainty; for the high income risk worker, equity exposure rises until retirement. We also evaluate how differences in social security benefits can influence retirement risk management.
This research was conducted with support from the Pension Research Council at The Wharton School of the University of Pennsylvania. We are grateful for useful comments from Jason Scott and Ramu Thiagarajan. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated. This is part of the NBER Program on the Economics of Aging. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.