Yuriy Gorodnichenko, University of California-Berkeley
Xiao Yin, University College London
Abstract: We implement a survey of stock market investors, focusing on their higher-order beliefs about the future stock market payoffs. The survey provides novel evidence on the relationship between first-order and higher-order beliefs, including how investors’ characteristics are associated with first-order and higher-order beliefs differentially. Through an information provision experiment, we show that while higher first-order beliefs significantly increase the holding of risky assets, higher higher-order beliefs significantly decrease the holding of risky assets. The findings provide important guidance for the design of macro-finance models.
Discussant: Cameron Peng, London School of Economics and Political Science
Abstract: We challenge two central tenets of lifecycle investing: (i) investors should diversify across stocks and bonds and (ii) the young should hold more stocks than the old. An even mix of 50% domestic stocks and 50% international stocks held throughout one’s lifetime vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests. These findings are based on a lifecycle model that features dynamic processes for labor earnings, Social Security benefits, and mortality and captures the salient time-series and cross-sectional properties of long-horizon asset class returns. Given the sheer magnitude of US retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.
Discussant: Kunal Sachdeva, University of Michigan
Taha Choukhmane, Massachusetts Institute of Technology
Christopher Palmer, Massachusetts Institute of Technology
Abstract: The welfare impact of increasing retirement contributions depends on how individuals adjust their spending, borrowing, and non-retirement savings in response. Using newly merged deposit-, credit-, and pension-account data from a large UK financial institution, we estimate the relevant elasticities by leveraging a policy that incrementally increased minimum retirement contributions in the U.K. from 2% to 8% of salary between March 2018 and April 2019. For every £1 reduction in monthly take-home pay due to higher employee pension contributions, consumers cut their spending by £0.34 (especially in the restaurant and leisure categories) and finance the remaining with lower deposit account balances and higher credit card debt levels. Those with lower initial deposit balances cut their spending the most, while those with significant liquid savings draw down their deposits. Interpreted via a structural life-cycle model, these results suggest that a social planner concerned about undersaving should target retirement saving interventions at low-liquidity individuals whose spending is more elastic to increased retirement saving. In contrast, interventions that increase the retirement
contributions of high-liquidity individuals are both less efficient (due to large crowd-out) and often regressive.
