Money-Back Guarantees in Individual Retirement Accounts: Are They Good Policy?

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

There are 2 versions of this paper

Date Written: August 17, 2024

Abstract

Pension products embedding guarantees have been adopted worldwide, including in the Pan-European Personal Pension Products (PEPP) recently launched in the European Union. Using an economic life cycle model where investors have access to stocks, bonds, and tax-qualified retirement accounts, we show that abandoning the guarantee could enhance old-age consumption for over 75% of retirees without harming pre-retirement consumption. Life cycle funds offer an alternative for capital preservation, but they would produce lower average payouts. Investors averse to equity losses accumulate only moderately more in guaranteed accounts, as these offer only limited protection against market crashes.

Keywords: individual retirement account, investment guarantee, retirement income, life cycle portfolio choice

JEL Classification: D14, G20, G11, G51, J26

Suggested Citation: Suggested Citation

Horneff, Vanya and Liebler, Daniel and Maurer, Raimond and Mitchell, Olivia S., Money-Back Guarantees in Individual Retirement Accounts: Are They Good Policy? (August 17, 2024). SAFE Working Paper No. 263 (2019), Wharton Pension Research Council Working Paper No. 2019-19, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3473626 or http://dx.doi.org/10.2139/ssrn.3473626