Faculty of Economics and Business Administration Publications Database

How will persistent low expected returns shape households economic behaviour?

Horneff, Vanya
Mitchell, Olivia S.
Volume: 18
Number: 4
Pages: 612 - 622
Month: October
ISSN-Print: 1474-7472
Link External Source: Online Version
Year: 2019

Many believe that global capital markets will generate lower returns in the future versus the past. We examine how persistently lower real returns will reshape work, retirement, saving, and investment behavior of older persons using a calibrated dynamic life cycle model. In a low return regime, workers build up less wealth in their tax-qualified 401(k) accounts versus the past, claim social security benefits later, and work more. Moreover, the better-educated are more sensitive to real interest rate changes, and the least-educated alter their behavior less. Interestingly, wealth inequality is lower in periods of persistent low expected returns.