Retirement Savings Portfolio Management

Published: 2006
Project ID: UM06-20


Proposals for private investment of Social Security contributions predict greater individual returns than would arise under the current system, yet much empirical evidence suggests that many individuals do not make sound investment decisions. To address the future role of social insurance in enhancing retirement security, this project will compile empirical evidence on retirement savings portfolio management and extend theoretical findings on how these portfolios should be managed. In order to address how proposals for private investment of Social Security contributions would affect household savings for retirement, attention will be paid to the role of two types of professionally-managed investment products–lifestyle and life cycle funds. Age-appropriate lifestyle funds have been endorsed by The President’s Commission to Strengthen Social Security as default allocations for personal investment accounts. The President’s reform proposal would allocate an individual’s entire portfolio to a lifecycle fund at age 47, subject to a waiver to opt out. This project will develop a behavioral model of retirement savings portfolio allocation in which households have heterogeneous preferences, expectations, and non-retirement wealth, as well as widely varying investment experience and acumen. The model will be used to perform simulations to assess the effects of various policies, ranging from complete personal autonomy for choice among funds to the placing of responsibility for all retirement funds in the hands of investment professionals.