How Will Persistent Low Expected Returns Shape Household Economic Behavior?
Many believe that global capital markets will generate lower returns in the future versus the past. We examine how persistently lower real returns will reshape work, retirement, saving, and investment behavior of older persons using a calibrated dynamic life cycle model. In a low return regime, workers build up less wealth in their tax-qualified 401(k) accounts versus the past, claim social security benefits later, and work more. Moreover, the better-educated are more sensitive to real interest rate changes, and the least-educated alter their behavior less. Interestingly, wealth inequality is lower in periods of persistent low expected returns.
The authors are grateful for research support from the German Investment and Asset Management Association (BVI), the SAFE Research Center funded by the State of Hessen and the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania. We also thank the initiative High Performance Computing in Hessen for grating us computing time at the LOEWE-CSC and Lichtenberg Cluster. David Richardson and participants at the 2018 NBER workshop in Jackson Hole, Wyoming provided helpful comments. Opinions and any errors are solely those of the authors and not of the institutions with which the authors are affiliated, or any individual cited. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Olivia S. Mitchell
Mitchell serves as an Independent Trustee for the Wells Fargo Advantage Funds and has received more than $10,000 from the TIAA Institute for research on retirement security.
How Will Persistent Low Expected Returns Shape Household Economic Behavior?, Vanya Horneff, Raimond Maurer, Olivia S. Mitchell. in Incentives and Limitations of Employment Policies on Retirement Transitions, Clark and Newhouse. 2019
Vanya Horneff & Raimond Maurer & Olivia S. Mitchell, 2019. "How will persistent low expected returns shape household economic behavior?," Journal of Pension Economics and Finance, vol 18(04), pages 612-622. citation courtesy of