The Private Value of Public Pensions

Quantitative Finance Research Centre, University of Technology, Sydney, Research Paper No. 211

41 Pages Posted: 17 Mar 2008

See all articles by Konstantin Petrichev

Konstantin Petrichev

University of Technology Sydney (UTS)

Susan Thorp

The University of Sydney Business School

Date Written: December 14, 2007

Abstract

Individual retirement savings accounts are replacing or supplementing public basic pensions. However at decumulation, replacing the public pension with an equivalent private sector income stream may be costly. We value the Australian basic pension by calculating the wealth needed to generate an equivalent payment stream using commercial annuities or phased withdrawals, but still accounting for investment and longevity risks. At age 65, a retiree needs an accumulation of about 8.5 years earnings to match the public pension in real value and insurance features. Increasing management fees by 1% raises required wealth by about one year's earnings. Delaying retirement by 5 years lowers required wealth by about one half year's earnings. Phased withdrawals have money's worth ratios close to 0.5 suggesting that private replacement costs are high.

Keywords: social security, longevity risk, phased withdrawal, stochastic present value

JEL Classification: H55, J14, G11

Suggested Citation

Petrichev, Konstantin and Thorp, Susan, The Private Value of Public Pensions (December 14, 2007). Quantitative Finance Research Centre, University of Technology, Sydney, Research Paper No. 211, Available at SSRN: https://ssrn.com/abstract=1106047 or http://dx.doi.org/10.2139/ssrn.1106047

Konstantin Petrichev

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo

Susan Thorp (Contact Author)

The University of Sydney Business School ( email )

Abercrombie Building
H70
The University Of Sydney, NSW 2006
Australia
0290366354 (Phone)

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