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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.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 42 (2008)
Issue (Month): 3 (June)
Pages: 1138-1145

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Handle: RePEc:eee:insuma:v:42:y:2008:i:3:p:1138-1145

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Web page: http://www.elsevier.com/locate/inca/505554

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  1. 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 S17-S31, 09.
  2. Erhan Bayraktar & Virginia R. Young, 2007. "Correspondence between Lifetime Minimum Wealth and Utility of Consumption," Papers math/0703820, arXiv.org.
  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. 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.
  5. Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
  6. Milevsky,Moshe A., 2006. "The Calculus of Retirement Income," Cambridge Books, Cambridge University Press, number 9780521842587, December.
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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, 03.
  2. Susan Thorp & Hardy Hulley & Rebecca McKibbin & Andreas Pedersen, 2009. "Means-Tested Income Support, Portfolio Choice And Decumulation In Retirement," CAMA Working Papers 2009-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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