Understanding Individual Account Guarantees

38 Pages Posted: 4 Feb 2008

See all articles by Marie-Eve Lachance

Marie-Eve Lachance

affiliation not provided to SSRN

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2003

Abstract

Demographic aging renders workers vulnerable to the inherent uncertainty of unfunded social security systems. This realization has set off a global wave of social security reforms, and more than 20 countries have set up Individual Accounts (IA) plans in response. Strengths of IAs are that participants gain ownership in their accounts, and they also may diversify their pension investments; additionally they produce a capitalized, funded system that enhances old-age economic security. While IAs reduce the risk participants face due to unfunded social security system, holding capital market investments in IAs could expose participants to fluctuations in the value of their pension assets. Concern over market volatility has prompted some to emphasize the need for "guarantees" of pension accumulations. This paper offers a way to think about guarantees in the context of a reform that includes Individual Accounts. We illustrate that guarantee costs can be important and they can vary significantly with time horizon, investment mix, and guarantee design. The findings indicate that plan designers and budget analysts would do well to recognize such costs and identify how they can be financed.

Suggested Citation

Lachance, Marie-Eve and Mitchell, Olivia S., Understanding Individual Account Guarantees (January 2003). Michigan Retirement Research Center Research Paper No. WP 2003-035. Available at SSRN: https://ssrn.com/abstract=1089066 or http://dx.doi.org/10.2139/ssrn.1089066

Marie-Eve Lachance (Contact Author)

affiliation not provided to SSRN

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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