Guaranteeing Individual Accounts

Abstract

Global aging is prompting workers and taxpayers everywhere to recognize their vulnerability to the inherent uncertainty of unfunded social-security systems. This has generated an international wave of social-security reforms over the last two decades, prompting more than 20 countries to establish Individual Account (IA) plans. In the United States, the idea of Individual Accounts has attracted recent interest with the release of the Final Report of the President's Commission to Strengthen Social Security (CSSS): here, voluntary individual accounts were proposed as a key element of a reformed national old-age system (see Commission to Strengthen Social Security, 2001; John F. Cogan and Mitchell, 2003). Strengths of IA's include the fact that participants gain ownership in their accounts and diversify their pension investments; nevertheless, IA participants also must bear capital-market risk. Recent market volatility has reminded investors of the importance of capital-market fluctuations and their potential impact on retirement income. In response, some policymakers have suggested that "guarantees" be designed to help protect IA investments. Abroad, such guarantees have been adopted in several Latin American countries undergoing reform, and most recently, in Japan and Germany (Mitchell and Kent Smetters, 2003). Sensible public policy recommending the adoption of guarantees must identify their costs and who will pay for them. In this paper, we discuss how to evaluate such costs in the context of a social-security reform that includes IA's, along with ways to finance them.

Implications of Money-Back Guarantees for Individual Retirement Accounts: Protection Then and Now

“…The impact of very low interest rates on the hedging cost for the money-back guarantee has been non-trivial. To illustrate how this works, we follow Lachance and Mitchell (2003) and apply option pricing techniques for a simplified IRA. We assume constant annual contributions ( = 1, … , ) by the plan participant until the end of the accumulation phase at time , and the plan provider is obliged to compensate for any losses below the sum of contributions.…”

“…. The put premiums charged by the provider from the participant's contributions are the cost of the money-back guarantee (see Lachance and Mitchell, 2003).…”

“…For instance, several Latin American nations instituted government guarantees for pension savings (e.g. Pennacchi, 1999;Fischer, 1999), and private sector institutions have also provided principal guarantees at market prices: for instance, Lachance and Mitchell (2003) showed that moneyback guarantees cost around 5% of annual contributions for U.S. Individual Retirement Accounts (IRAs).…”

Las pensiones en Nigeria: análisis del nuevo sistema de cuentas individuales

“…Dado que estas simulaciones se basan en datos europeos o norteamericanos, es posible que arrojen resultados más favorables que cualquiera que haya sido realizada para Nigeria, por la sencilla razón de que la economía de este país es mucho más volátil. Además, la volatilidad es uno de los determinantes del monto del posible déficit con respecto a la rentabilidad total esperada del ahorro de pensiones (véanse Bodie, 1995; Lachance y Mitchell, 2003).…”

Dynamic Asset Allocation with Regime Shifts and Long Horizon CVaR-Constraints

“…Previous research on minimum return guarantees are mainly carried out in an option based framework, e.g. Bodie (1995), Gründl et al (2004), and Lachance and Mitchell (2003). In this paper, we focus on an asset allocation approach instead.…”