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The Cost of Minimum Pension Guarantee

28 Pages Posted: 7 Nov 2005  

Tapen Sinha

Instituto Tecnológico Autónomo de México (ITAM) - Division of Actuarial Science, Statistics and Mathematics; Nottingham University Business School

Alejandro Renteria

Instituto Tecnológico Autónomo de México (ITAM) - Division of Actuarial Science, Statistics and Mathematics

Date Written: October 2005

Abstract

We model minimum pension guarantee using a simulation approach. Lachance and Mitchell (2002) have shown that it could be important if and when individual accounts are introduced in the United States. We model ours with real data from Mexico where individual accounts are already a reality and the minimum pension guarantee is already enshrined by law. We calculate the probability of the government needing to honor the guarantee and estimate the cost of such a promise using a real options approach. Higher investment in the stock market turns out to be the key. The higher the proportion of investment allowed by law in stocks, the lower the probability of government support.

Keywords: minimum pension guarantee, government liability, real options, Mexico, AFOREs

JEL Classification: G23, H55

Suggested Citation

Sinha, Tapen and Renteria, Alejandro, The Cost of Minimum Pension Guarantee (October 2005). Available at SSRN: https://ssrn.com/abstract=839213 or http://dx.doi.org/10.2139/ssrn.839213

Tapen Sinha (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Division of Actuarial Science, Statistics and Mathematics ( email )

Rio Hondo #1 Col. Tizapan San Angel
C.P. 01000 Del. Alvaro Obregon
52 55 5628 4088 (Phone)
52 55 5628 4086 (Fax)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Alejandro Renteria

Instituto Tecnológico Autónomo de México (ITAM) - Division of Actuarial Science, Statistics and Mathematics ( email )

Rio Hondo No. 1, Tizapan, San Angel
Mexico, DF 01000
Mexico

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