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

  • Zvi Bodie

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.

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File URL: http://www.nber.org/papers/w0442.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0442.

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Date of creation: Feb 1980
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Publication status: published as Bodie, Zvi. "An Innovation for Stable Real Retirement Income." The Journal of Portfolio Management, Vol. 7, No. 1, (Fall 1980) pp. 5-13.
Handle: RePEc:nbr:nberwo:0442
Note: ME PE
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  1. 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.
  2. Zvi Bodie, 1979. "Inflation Risk and Capital Market Equilibrium," NBER Working Papers 0373, National Bureau of Economic Research, Inc.
  3. Stanley Fischer, 1979. "Corporate Supply of Index Bonds," NBER Working Papers 0331, National Bureau of Economic Research, Inc.
  4. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
  5. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May.
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