Personal pension plans and stock market volatility
One of the strongest objections to personal pension plans is that they transfer investment risk to individual workers, who are then exposed to the vagaries of equity and bond markets. Using historical United States data, the authors investigate the impact of the volatility of investment returns on replacement rates in the context of personal pension plans. They find large fluctuations in replacement rates across different cohorts of workers, if undiversified portfolios are used. They then explore a number of simple financial strategies for coping with this problem, including: a) portfolio diversification; b) a late, gradual shift to bonds; c) a gradual purchase of nominal or real annuities; d) a purchase of variable annuities. The first three strategies lower the volatility of replacement rates, but at significant cost in terms of lower replacement rates. The purchase of variable annuities reduces the dispersion of replacementrates across generations without lowering their level - because of the persistence of the equity premium and the fact that the volatility of equity returns is lower, the longer the holding period. Sophisticated financial engineering promises more efficient solutions to this problem, but it may not be feasible to apply it in developing countries (or in developing financial markets). Neither authors'approach nor the more sophisticated financial engineering solutions would be able to deal effectively with persistent deviations of investment returns from long trends. But the authors'findings suggest that overconcern about the impact on replacement rates of short-term volatility in stock markets may not be warranted.
|Date of creation:||31 Oct 2000|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brown, Jeffrey R., 2001.
"Private pensions, mortality risk, and the decision to annuitize,"
Journal of Public Economics,
Elsevier, vol. 82(1), pages 29-62, October.
- Jeffrey R. Brown, 1999. "Private Pensions, Mortality Risk, and the Decision to Annuitize," NBER Working Papers 7191, National Bureau of Economic Research, Inc.
- Ravi Jagannathan & Narayana R. Kocherlakota, 1996. "Why should older people invest less in stock than younger people?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 11-23.
- Valdes-Prieto, Salvador, 1998. "Risks in pensions and annuities : efficient designs," Social Protection and Labor Policy and Technical Notes 20847, The World Bank.
- William Goetzmann & Philippe Jorion, 1997. "A Century of Global Stock Markets," Yale School of Management Working Papers ysm53, Yale School of Management, revised 01 Aug 2000.
- William N. Goetzmann & Philippe Jorion, 2004. "A Century of Global Stock Markets," Yale School of Management Working Papers ysm16, Yale School of Management.
- Philippe Jorion & William N. Goetzmann, 2000. "A Century of Global Stock Markets," NBER Working Papers 7565, National Bureau of Economic Research, Inc.
- William N. Goetzmann & Philippe Jorion, 1997. "A Century of Global Stock Markets," NBER Working Papers 5901, National Bureau of Economic Research, Inc.
- Salvador Valdés & Gonzalo Edwards, "undated". "Jubilación en los Sistemas Pensionales Privados," Documentos de Trabajo 182, Instituto de Economia. Pontificia Universidad Católica de Chile..
- Zvi Bodie, 2001. "Financial Engineering and Social Security Reform," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 291-320 National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2463. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.