One Size Fits All? Drawdown Structures in Australia and the Netherlands

The Journal of the Economics of Ageing. Available online 25 July 2018. DOI: 10.1016/j.jeoa.2018.07.002

36 Pages Posted: 25 Aug 2017 Last revised: 4 Aug 2018

See all articles by Jennifer Alonso-García

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics; ARC Centre of Excellence in Population Ageing Research; Netspar

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Date Written: March 14, 2018

Abstract

Australia and the Netherlands both combine an unfunded non-contributory flat rate pension with prefunded earnings related retirement schemes. Notwithstanding this similarity of structure, however, the two systems are very different. The Netherlands mandates annuitized drawdown structures. In Australia, no prescription, or even guidance, is offered. In both cases, products that better meet the needs of increasingly heterogeneous retirement cohorts are under consideration. We analyze the impact of various popular product choices in the Netherlands and in Australia on the welfare of individuals allowing for different income levels. The study assumes the market return and mortality are stochastic and includes the impact of mean-testing, which reduces the value of the first pillar flat rate. Products offering longevity insurance are the most preferred in the absence of bequest, whereas more flexible portfolios with phased withdrawals score higher when individuals have a bequest motive. The state pension replaces the need to purchase indexed annuities for low income individuals whereas it does not crowd out the demand for longevity insurance for median and high income percentiles. We conclude that the income category, bequests, state pension and risk aversion have to be allowed for in any sound welfare assessment of retirement income portfolios since these affect the ranking of portfolios more sharply than mortality differentials and loadings.

Keywords: Utility, CEC, Income, Retirement Income, Means-test

JEL Classification: H55, H75, J32

Suggested Citation

Alonso-García, Jennifer and Sherris, Michael, One Size Fits All? Drawdown Structures in Australia and the Netherlands (March 14, 2018). The Journal of the Economics of Ageing. Available online 25 July 2018. DOI: 10.1016/j.jeoa.2018.07.002, Available at SSRN: https://ssrn.com/abstract=3025064 or http://dx.doi.org/10.2139/ssrn.3025064

Jennifer Alonso-García (Contact Author)

Université Libre de Bruxelles (ULB) - Department of Mathematics ( email )

Brussels
Belgium

ARC Centre of Excellence in Population Ageing Research ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

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