Implications of Money-Back Guarantees for Individual Retirement Accounts: Protection Then and Now

59 Pages Posted: 23 Oct 2019

See all articles by Vanya Horneff

Vanya Horneff

Goethe University Frankfurt - Research Center SAFE

Daniel Liebler

Goethe University Frankfurt - Department of Finance

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 21, 2019

Abstract

In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.

Keywords: individual retirement account, investment guarantee, longevity risk, retirement income, life cycle model

JEL Classification: D14, D91, G11

Suggested Citation

Horneff, Vanya and Liebler, Daniel and Maurer, Raimond and Mitchell, Olivia S., Implications of Money-Back Guarantees for Individual Retirement Accounts: Protection Then and Now (October 21, 2019). SAFE Working Paper No. 263 (2019). Available at SSRN: https://ssrn.com/abstract=3473626 or http://dx.doi.org/10.2139/ssrn.3473626

Vanya Horneff

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Daniel Liebler

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany

Raimond Maurer (Contact Author)

Goethe University Frankfurt - Finance Department ( email )

Grüneburgplatz 1
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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