Using a stochastic economic scenario generator to analyse uncertain superannuation and retirement outcomes

40 Pages Posted: 22 May 2019 Last revised: 4 Aug 2020

See all articles by Wen Chen

Wen Chen

CSIRO Data61

Bonsoo Koo

Monash Business School

Yunxiao Wang

Monash University - Department of Econometrics and Business Statistics

Colin O'Hare

Monash University - Department of Econometrics & Business Statistics

Nicolas Langrené

Government of the Commonwealth of Australia - CSIRO (Commonwealth Scientific and Industrial Research Organisation)

Peter Toscas

Government of the Commonwealth of Australia - CSIRO (Commonwealth Scientific and Industrial Research Organisation)

Zili Zhu

Government of the Commonwealth of Australia - CSIRO (Commonwealth Scientific and Industrial Research Organisation)

Date Written: May 1, 2019

Abstract

The retirement systems in many developed countries have been increasingly moving from Defined Benefit (DB) towards the Defined Contribution (DC) system. In such systems, financial and longevity risks are shifted from the pension provider to the retiree. This paper uses a probabilistic approach to analyse the uncertainty associated with the retirement accumulation and decumulation in a DC world. We use an economic scenario generator (ESG) called Simulation of Uncertainty for Pension Analysis (SUPA) to project uncertain future economic outcomes. As the retirement system in Australia is predominantly DC in nature, and to validate the accuracy of the SUPA model, we use a unique dataset of over five million Australian individuals over ten years obtained from the Australian Department of Human Services (DHS) to benchmark the effectiveness of the SUPA model for simulating the superannuation accumulation phase of individuals. Our probabilistic approach allows us to estimate various outcomes regarding the retirement accumulation and decumulation phases, such as worst-case percentiles accounting for the risks associated with investment returns and other economic variables. In particular, our approach provides an advanced tool to analyse the sustainability of popular drawdown strategies during retirement under the current pension and superannuation scheme.

Keywords: superannuation, Economic Scenarios Generator, SUPA model, Monte Carlo simulation, accumulation, decumulation, Age Pension, retirement income

JEL Classification: H55, D91, D31, E21, E24, E27

Suggested Citation

Chen, Wen and Koo, Bonsoo and Wang, Yunxiao and O'Hare, Colin and Langrené, Nicolas and Toscas, Peter and Zhu, Zili, Using a stochastic economic scenario generator to analyse uncertain superannuation and retirement outcomes (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3362700 or http://dx.doi.org/10.2139/ssrn.3362700

Wen Chen (Contact Author)

CSIRO Data61 ( email )

34 Village Street
Melbourne, Victoria 3008
Australia

Bonsoo Koo

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia
+61 3 9905 0547 (Phone)
+61 3 9905 5474 (Fax)

Yunxiao Wang

Monash University - Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield East, 3145
Australia

Colin O'Hare

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Nicolas Langrené

Government of the Commonwealth of Australia - CSIRO (Commonwealth Scientific and Industrial Research Organisation) ( email )

Melbourne
Australia

Peter Toscas

Government of the Commonwealth of Australia - CSIRO (Commonwealth Scientific and Industrial Research Organisation)

41 Boggo Rd
Dutton Park, Queensland
Australia

Zili Zhu

Government of the Commonwealth of Australia - CSIRO (Commonwealth Scientific and Industrial Research Organisation) ( email )

Gate 5 Normanby Road
Clayton
Melbourne, Australian Capital Territory 3168
Australia
61 3 95458003 (Phone)
61 3 9545 8080 (Fax)

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