Pricing Personal Account Benefit Guarantees

Clark Burdick and Kent Smetters

Edited by Andrew Biggs

in Social Security Policy in a Changing Environment

Published by University of Chicago Press

Published in print June 2009 | ISBN: 9780226076485
Published online February 2013 | e-ISBN: 9780226076508 | DOI:
Pricing Personal Account Benefit Guarantees

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This chapter demonstrates how a model for calculating the expected cost of a benefit guarantee can easily be modified to present the market price of personal account guarantees as a supplement to expected cost valuations. Personal accounts invested in equities will tend to increase average retirement benefits for workers choosing to participate. In proposals that allow for portfolio choice, it could be expected that inclusion of a benefit guarantee would alter the average portfolio allocation of account holders. Once an appropriate model is constructed to calculate the expected cost of a guarantee, a change of a single parameter of that model enables the analyst to calculate the risk neutral guarantee cost as well. From a practical perspective, the risk neutral guarantee costs allows for greater information to be provided to policymakers with relatively little additional research cost.

Keywords: benefit guarantees; cost; personal accounts; account holders; risk neutral guarantee

Chapter.  10793 words.  Illustrated.

Subjects: Public Economics

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