Advanced Search
MyIDEAS: Login

The Demand for Guarantees in Social Security Personal Retirement Accounts

Contents:

Author Info

  • Olivia S. Mitchell

    (The Wharton School of the University of Pennsylvania)

  • Alexander Muermann

    (The Wharton School of the University of Pennsylvania)

Abstract

This project evaluates how workers might invest their Personal Retirement Account (PRA) funds between safe and risky assets, depending on whether they are offered a rate of return guarantee on the risky asset. We focus on how asset allocation decisions might differ depending on participants’ attitudes about risk and regret. If, for example, the return on the risky asset turns out to be very high when a worker retires, he might regret not having allocated a large enough portion of his contributions to the risky asset. On the contrary, if the stock market does poorly, the retiree might regret having invested at all in that asset. We show that anticipated disutility from regret can have a potent effect on investment choices in a PRA. If there is no guarantee, regret induces investors to move away from extreme decisions: that is, investors who take regret into account hold less stock if the risk premium is high, but more stocks if the risk premium is low. Further, a rate of return guarantee provided at no cost to the plan participant induces him to hold more stocks, with or without regret. We also show that, with or without regret, investors' willingness to pay for a guarantee rises with the level of the guaranteed return. This research could be informative regarding the potential profitability of the guaranteed pension business, which would help determine whether a government subsidy would be required to bring these products to market.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp060.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp060.

as in new window
Length: 25 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:mrr:papers:wp060

Contact details of provider:
Postal: P.O. Box 1248, Ann Arbor, MI 48104
Phone: (734) 615-0422
Fax: (734) 647-4575
Email:
Web page: http://www.mrrc.isr.umich.edu/publications/papers/
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Smetters, Kent, 2002. "Controlling the cost of minimum benefit guarantees in public pension conversions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 9-33, March.
  2. Marie-Eve Lachance & Olivia S. Mitchell, 2003. "Understanding Individual Account Guarantees," Working Papers wp035, University of Michigan, Michigan Retirement Research Center.
  3. John F. Cogan & Olivia S. Mitchell, 2002. "The Role of Economic Policy in Social Security Reform: Perspectives from the President's Commission," NBER Working Papers 9166, National Bureau of Economic Research, Inc.
  4. Marie-Eve Lachance & Olivia S. Mitchell, 2003. "Guaranteeing Individual Accounts," American Economic Review, American Economic Association, vol. 93(2), pages 257-260, May.
  5. Marie-Eve Lachance & Olivia S. Mitchell, 2002. "Guaranteeing Defined Contribution Pensions: The Option to Buy-Back a Defined Benefit Promise," NBER Working Papers 8731, National Bureau of Economic Research, Inc.
  6. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
  7. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
  8. Martin Feldstein, 2005. "Reducing the Risk of Investment-Based Social Security Reform," NBER Working Papers 11084, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:mrr:papers:wp060. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (MRRC Administrator).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.