Working Paper: CEPR ID: DP4852
Authors: Francisco J. Gomes; Alexander Michaelides; Valery Polkovnichenko
Abstract: We calibrate a life-cycle model with uninsurable labour income risk and borrowing constraints to match wealth accumulation and portfolio allocation profiles of direct and indirect stockholders in both taxable and tax-deferred accounts. Tax-deferred accounts generate an increase in wealth accumulation that is larger for wealthier households. Furthermore, while the cost of following a fixed contribution rate over the life cycle is small, the optimal rate can differ substantially across households, and the welfare losses from choosing the wrong one can be substantial. Finally, the welfare gain from having access to a tax-deferred account ranges from less than 0.1% to 11.5%, depending on the preference parameters.
Keywords: liquidity constraints; portfolio choice; retirement savings; tax deferred accounts; uninsurable labour income risk
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax-deferred accounts (TDAs) (F38) | total wealth accumulation (E21) |
| higher risk aversion (D81) | increase in wealth accumulation from TDAs (G51) |
| higher elasticity of intertemporal substitution (D15) | increase in wealth accumulation from TDAs (G51) |
| optimal contribution rate to TDAs (H21) | varies throughout the lifecycle (D25) |
| younger households being liquidity constrained (D14) | contributing less to TDAs (H23) |
| welfare gain from access to a TDA (D69) | higher for investors with higher risk aversion (G11) |
| tax incentives (H20) | isolate effects on wealth accumulation (E21) |