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The private value of public pensions

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  • Petrichev, Konstantin
  • Thorp, Susan

Abstract

As individual retirement savings accounts replace public pensions and defined benefit schemes, more retirees will decumulate using commercial income streams rather than public or corporate annuities. Here we use an approximation to the retirement income problem [Huang, H., Milevsky, M.A., Wang, J., 2004. Ruined moments in your life: How good are the approximations? Insurance: Math. Econom. 34, 421-447] to compute the cost of replicating a public real life annuity (the Australian Age Pension) using commercial decumulation products. We treat the public pension as a phased withdrawal plan, matching insurance and payment features, and back out the stochastic present value of the plan under an arbitrarily small ruin probability. To reproduce the pension payment with 99% certainty, a male retiree needs 3.6 times the current average retirement savings account balance, and a female retiree needs more than 10 times the average female account balance. At 95% certainty, required wealth falls by around 25%. We measure separately the impact of gender, investment strategy, retirement age and management fees on this valuation.

Suggested Citation

  • Petrichev, Konstantin & Thorp, Susan, 2008. "The private value of public pensions," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 1138-1145, June.
    • Handle: RePEc:eee:insuma:v:42:y:2008:i:3:p:1138-1145
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    References listed on IDEAS

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    1. Huang, H. & Milevsky, M. A. & Wang, J., 2004. "Ruined moments in your life: how good are the approximations?," Insurance: Mathematics and Economics, Elsevier, vol. 34(3), pages 421-447, June.
    2. Hazel Bateman & Susan Thorp, 2008. "Choices and Constraints over Retirement Income Streams: Comparing Rules and Regulations," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages 17-31, September.
    3. Suzanne Doyle & Olivia S. Mitchell & John Piggott, 2004. "Annuity Values in Defined Contribution Retirement Systems: Australia and Singapore Compared," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 37(4), pages 402-416, December.
    4. Estelle James & Xue Song, 2001. "Annuities Markets Around the World: Money’s Worth and Risk Intermediation," CeRP Working Papers 16, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    5. Milevsky,Moshe A., 2006. "The Calculus of Retirement Income," Cambridge Books, Cambridge University Press, number 9780521842587.
    6. Erhan Bayraktar & Virginia Young, 2007. "Correspondence between lifetime minimum wealth and utility of consumption," Finance and Stochastics, Springer, vol. 11(2), pages 213-236, April.
    7. Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
    8. Moshe Milevsky & Chris Robinson, 2000. "Self-Annuitization and Ruin in Retirement," North American Actuarial Journal, Taylor & Francis Journals, vol. 4(4), pages 112-124.
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    Cited by:

    1. Hardy Hulley & Rebecca Mckibbin & Andreas Pedersen & Susan Thorp, 2013. "Means-Tested Public Pensions, Portfolio Choice and Decumulation in Retirement," The Economic Record, The Economic Society of Australia, vol. 89(284), pages 31-51, March.
    2. Milevsky, Moshe A., 2020. "Calibrating Gompertz in reverse: What is your longevity-risk-adjusted global age?," Insurance: Mathematics and Economics, Elsevier, vol. 92(C), pages 147-161.
    3. Susan Thorp & Hardy Hulley & Rebecca McKibbin & Andreas Pedersen, 2009. "Means-Tested Income Support, Portfolio Choice and Decumulation in Retirement," Research Paper Series 248, Quantitative Finance Research Centre, University of Technology, Sydney.

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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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