Optimal savings for retirement : The role of individual accounts and disaster expectations

Abstract

We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts a ect households' savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast addon accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare e ects across income groups. Carve-out accounts generate welfare gains for high and middle income earners but welfare losses for low income earners. In the presence of rare stock market disasters, individual accounts with default portfolio allocation crowd out direct stockholding and substantially reduce welfare.