Retirement Investments Through the Life Cycle and Individual Risk Aversion in a Defined Contribution Retirement System

I develop a dynamic model of individual lifetime behavior and jointly estimate a set of correlated dynamic equations for observed risk aversion, wealth-related decisions (employment,occupation, investment, and savings), and... [ view full abstract ]

I develop a dynamic model of individual lifetime behavior and jointly estimate a set of correlated dynamic equations for observed risk aversion, wealth-related decisions (employment,occupation, investment, and savings), and other characteristics that an individual may value independently of wealth (family and health) in a setting with a defined contribution retirement system, specifically under the Chilean framework. In the estimable model, I allow correlation through observed and unobserved permanent and time-varying individual heterogeneity. In an empirical model that allows risk preferences to be an endogenous determinant of investment decisions, I propose alternative time-varying default investment schemes showing that, over seven years, slightly riskier investment strategies may increase individual asset accumulation by eight percent or more. I find that individuals react to riskier investment strategies, despite the observed inertia in their behavior. Increases in mandatory contribution rates by three and five percent generate statistically significant increases in asset accumulation of 10 and 16 percent, respectively, generating little crowd-out effects in investments, savings, and employment outcomes. Other policy experiments show that part-time job opportunities for women with children who are currently not employed significantly increase wealth accumulation by 10 percent over 7 years.