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Optimal Retirement Benefit Guarantees

Author

Listed:
  • Stavros Panageas

    (University of Pennsylvania)

Abstract
The majority of countries that switched to funded private account retirement systems opted to complement such systems with explicit guarantees to retirees and agents saving for retirement. The motivation was that a social insurance system should provide a minimum standard of living in retirement. This paper studies the optimal design of such guarantees. Particular attention is paid to moral hazard, i.e. the incentive to take more risk once the guarantees are in place. Surprisingly, the simple policy of complementing private accounts with a fixed annuity in retirement is shown to be an optimal policy in the baseline model. It is also shown that the standard practice of pricing retirement benefit guarantees as contingent claims and then choosing the minimum cost guarantee may be a misleading indicator for welfare comparisons between alternative policies.

Suggested Citation

  • Stavros Panageas, 2007. "Optimal Retirement Benefit Guarantees," 2007 Meeting Papers 172, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:172
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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