Working Paper: NBER ID: w24311
Authors: Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
Abstract: This paper explores how an environment of persistent low returns influences saving, investing, and retirement behaviors, as compared to what in the past had been thought of as more “normal” financial conditions. Our calibrated lifecycle dynamic model with realistic tax, minimum distribution, and Social Security benefit rules produces results that agree with observed saving, work, and claiming age behavior of U.S. households. In particular, our model generates a large peak at the earliest claiming age at 62, as in the data. Also in line with the evidence, our baseline results show a smaller second peak at the (system-defined) Full Retirement Age of 66. In the context of a zero return environment, we show that workers will optimally devote more of their savings to non-retirement accounts and less to 401(k) accounts, since the relative appeal of investing in taxable versus tax-qualified retirement accounts is higher in a low return setting. Finally, we show that people claim Social Security benefits later in a low interest rate environment.
Keywords: No keywords provided
JEL Codes: D14; D15; D78; D91; G11; G22; H55; J14; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low expected returns (G12) | allocation to non-retirement accounts (D14) |
| low expected returns (G12) | claiming social security benefits later (H55) |
| low expected returns (G12) | higher claiming ages (J26) |