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The Private Value of Public Pensions

  • Konstantin Petrichev
  • Susan Thorp

    (University of Sydney)

Individual 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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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 211.

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Length: 41 pages
Date of creation: 01 Dec 2007
Date of revision:
Publication status: Published as: Petrichev, K. and Thorp, S., 2008, "The Private Value of Public Pensions", Insurance: Mathematics and Economics, 42(3), 1138-1145.
Handle: RePEc:uts:rpaper:211
Contact details of provider: Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777
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  1. Hazel Bateman & Susan Thorp, 2007. "Choices and constraints over retirement income streams: comparing rules and regulations," Discussion Papers 2007-29, School of Economics, The University of New South Wales.
  2. Suzanne Doyle & Olivia S. Mitchell & John Piggott, 2004. "Annuity Values in Defined Contribution Retirement Systems: Australia and Singapore Compared," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 37(4), pages 402-416, December.
  3. Milevsky,Moshe A., 2006. "The Calculus of Retirement Income," Cambridge Books, Cambridge University Press, number 9780521842587.
  4. Erhan Bayraktar & Virginia Young, 2007. "Correspondence between lifetime minimum wealth and utility of consumption," Finance and Stochastics, Springer, vol. 11(2), pages 213-236, April.
  5. Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
  6. Huang, H. & Milevsky, M. A. & Wang, J., 2004. "Ruined moments in your life: how good are the approximations?," Insurance: Mathematics and Economics, Elsevier, vol. 34(3), pages 421-447, June.
  7. Estelle James & Xue Song, 2001. "Annuities Markets Around the World: Money’s Worth and Risk Intermediation," CeRP Working Papers 16, Center for Research on Pensions and Welfare Policies, Turin (Italy).
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