Purchasing-Power Annuities: Financial Innovation for Stable Real Retirement Income in an Inflationary Environment

30 Pages Posted: 28 Jun 2004  

Zvi Bodie

Boston University - Department of Finance & Economics

Date Written: February 1980

Abstract

This paper is organized as follows: The first part of the paper introduces the topic. In the next part, we explore the inadequacies of conventional and equity-based variable annuities in an inflationary environment by contrasting them with a hypothetical PPA. We then try to assess the suitability of money market instruments hedged with commodity futures as the asset base for PPA's, and consider the possibility of having financial institutions offer them to the public. The major conclusion of the paper is that private pension plans could offer retiring employees a choice between a conventional money-fixed annuity or a PPA, both of which would cost theemployer the same amount of money to fund, although this option would require the PPA benefitlevel in the first few years of retirement to be lower than that of the conventional annuity.

Suggested Citation

Bodie, Zvi, Purchasing-Power Annuities: Financial Innovation for Stable Real Retirement Income in an Inflationary Environment (February 1980). NBER Working Paper No. w0442. Available at SSRN: https://ssrn.com/abstract=262065

Zvi Bodie (Contact Author)

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

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