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Purchasing-Power Annuities: Financial Innovation for Stable Real Retirement Income in an Inflationary Environment

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  • Zvi Bodie

Abstract

This paper is organized as follows: The first part of the paper introduces the topic. In the next part, we explore the inadequacies of conventional and equity-based variable annuities in an inflationary environment by contrasting them with a hypothetical PPA. We then try to assess the suitability of money market instruments hedged with commodity futures as the asset base for PPA's, and consider the possibility of having financial institutions offer them to the public. The major conclusion of the paper is that private pension plans could offer retiring employees a choice between a conventional money-fixed annuity or a PPA, both of which would cost theemployer the same amount of money to fund, although this option would require the PPA benefitlevel in the first few years of retirement to be lower than that of the conventional annuity.

Suggested Citation

  • Zvi Bodie, 1980. "Purchasing-Power Annuities: Financial Innovation for Stable Real Retirement Income in an Inflationary Environment," NBER Working Papers 0442, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0442
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    References listed on IDEAS

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    1. Zvi Bodie, 1979. "Inflation Risk and Capital Market Equilibrium," NBER Working Papers 0373, National Bureau of Economic Research, Inc.
    2. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-282, June.
    3. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-470, May.
    4. Stanley Fischer, 1979. "Corporate Supply of Index Bonds," NBER Working Papers 0331, National Bureau of Economic Research, Inc.
    5. Blinder, Allan S., 1977. "Indexing the economy through financial intermediation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 69-105, January.
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    Cited by:

    1. Pesando, James E, 1984. "Employee Evaluation of Pension Claims and the Impact of Indexing Initiatives," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 1-17, January.
    2. Martin Feldstein, 1982. "Private Pensions as Corporate Debt," NBER Chapters, in: The Changing Roles of Debt and Equity in Financing U.S. Capital Formation, pages 75-90, National Bureau of Economic Research, Inc.
    3. Feldstein, Martin, 1981. "Private Pensions and Inflation," American Economic Review, American Economic Association, vol. 71(2), pages 424-428, May.
    4. Martin Feldstein, 1983. "Should Private Pensions Be Indexed?," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 211-230, National Bureau of Economic Research, Inc.
    5. Benjamin M. Friedman, 1980. "Effects of Shifting Saving Patterns on Interest Rates and Economic Activity," NBER Working Papers 0587, National Bureau of Economic Research, Inc.

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