A 1996 grant produced the paper, "A Portfolio Model of Retirement Income Including Social Security".
The paper uses the Markowitz portfolio optimization methodology to examine the impact of Social Security on the optimal portfolio for individuals. The rate of return analysis that is usually applied to Social Security ignores the value of the longevity insurance provided by this program and does not consider potential diversification benefits. Evaluation of Social Security as a part of the portfolio should consider, not only the rate of return, but also its risk and covariance of its returns with other assets in the household portfolio, both marketable and non-marketable. The results of the analysis show that Social Security is an important component of the optimal portfolio for many risk averse individuals, and that the optimal percentage allocation increases when Social Security exhibits low or negative correlation with other asset returns and relatively low standard deviation of its rate of return.
