Life-cycle personal accounts proposal for Social Security: An evaluation of President Bush's proposal

The life-cycle portfolio proposal for personal accounts within a Social Security system would have the government undertake the dynamic portfolio allocation program for individuals. This paper evaluates, using U.S. historical data 1871–2004, several versions of conventional life-cycle portfolios. The results show disappointing performance relative to the rhetoric of the promoters of the proposal. Dynamic portfolio theory suggests that the optimal life-cycle portfolio may look very different from the conventional form. Moreover, behavioral finance suggests that the design of a life-cycle portfolio for Social Security should consider the attitudes and habits of individuals and as well as their diversity.