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A Cost Analysis of a Minimum Pension Guarantee for the Individual Pension System in Turkey

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  • Sule Sahin
  • Adem Yavuz Elveren

Abstract

The returns from individual accounts in pension schemes are subject to fluctuations in capital markets. This increases income uncertainty for the beneficiary and exposes individuals to the risk of fluctuations in the economy in general, and of the stock market in particular. This fact has recently gotten considerable attention from policymakers. A minimum pension guarantee is a way to avoid this pitfall by providing a minimum annuity regardless of the actual investment performance of individual accounts. In this study, we present a cost analysis of a minimum benefit guarantee mechanism for the Individual Pension System in Turkey, a privately managed defined contribution scheme which was introduced in 2003 as a complement to the traditional pay-as-you-go system. We examine the cost estimates and the probability of guaranteed payoffs under various economic and demographic assumptions.

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Bibliographic Info

Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2009_13.

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Length: 38 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:uta:papers:2009_13

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Keywords: Contribution; Individual Pension System; Pension Guarantees; Turkey;

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References

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  1. Marie-Eve Lachance & Olivia S. Mitchell, 2003. "Understanding Individual Account Guarantees," Working Papers wp035, University of Michigan, Michigan Retirement Research Center.
  2. Gasparini, Leonardo & Alejo, Javier & Haimovich, Francisco & Olivieri, Sergio & Tornarolli, Leopoldo, 2007. "Poverty among the Elderly in Latin America and the Caribbean," MPRA Paper 42957, University Library of Munich, Germany.
  3. Cooper, Russell W. & Ross, Thomas W., 2003. "Protecting underfunded pensions: the role of guarantee funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(03), pages 247-272, November.
  4. Kent Smetters, 2002. "Controlling the Cost of Minimum Benefit Guarantees in Public Pension Conversions," NBER Working Papers 8732, National Bureau of Economic Research, Inc.
  5. Mario Jametti, 2007. "Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance - An Overview of Theory and Empirics," Working Papers 2007_1, York University, Department of Economics.
  6. Ahmet Tuncay Teksoz & Serdar Sayan, 2002. "Simulation of Benefits and Risks after the Planned Privatization of the Pension System in Turkey: Is the Expected Boost to Financial Markets Feasible?," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 38(5), pages 23-45, October.
  7. Adem Y. Elveren, 2008. "Social Security Reform in Turkey: A Critical Perspective," Review of Radical Political Economics, Union for Radical Political Economics, vol. 40(2), pages 212-232, June.
  8. Nielson, Norma L. & Chan, David K. W., 2007. "Private pensions and government guarantees: clues from Canada," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(01), pages 45-66, March.
  9. 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.
  10. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
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