Strategic Asset Allocation for Individual Investors: The Impact of the Present Value of Social Security Benefits
Fraser, SP, Jennings, WW, & King, DR. 2001. Strategic Asset Allocation for Individual Investors: The Impact of the Present Value of Social Security Benefits, Financial Services Review, 9(4): 295-326.
This paper demonstrates the dramatic effect of social security wealth on individuals’ asset allocation. We first discuss why social security wealth should be included in portfolio asset-mix decisions. We then draw parallels between social security benefits and inflation-indexed treasury bonds to help quantify the present value of social security benefits. Finally, we show the portfolio impact of including social security wealth under several asset-mix decision rules. Excluding social security wealth from the asset mix decision results in sub-optimal portfolios. Including social security wealth provides an incentive for including more stock in the asset mix.