The Private Value of Public Pensions
AbstractIndividual retirement savings accounts are replacing or supplementing public basic pensions. However at decumulation, replacing the public pension with an equivalent private sector income stream may be costly. We value the Australian basic pension by calculating the wealth needed to generate an equivalent payment stream using commercial annuities or phased withdrawals, but still accounting for investment and longevity risks. At age 65, a retiree needs an accumulation of about 8.5 years earnings to match the public pension in real value and insurance features. Increasing management fees by 1% raises required wealth by about one year's earnings. Delaying retirement by 5 years lowers required wealth by about one half year's earnings. Phased withdrawals have money's worth ratios close to 0.5 suggesting that private replacement costs are high.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 211.
Date of creation: 01 Dec 2007
Date of revision:
social security; longevity risk; phased withdrawal; stochastic present value;
Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-AGE-2008-02-23 (Economics of Ageing)
- NEP-ALL-2008-02-23 (All new papers)
- NEP-IAS-2008-02-23 (Insurance Economics)
- NEP-PUB-2008-02-23 (Public Finance)
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