Valuing Basic Pensions

Petrichev, K; Thorp, SJ

Valuing Basic Pensions

Petrichev, K Thorp, SJ

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Publisher:: Asia-Pacific Risk and Insurance Association
Publication Type:: Conference Proceeding
Citation:: Proceedings of the 11th Annual Conference of the Asia-Pacific Risk and Insurance Association, 2007, pp. 1 - 35
Issue Date:: 2007-01

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Field	Value	Language
dc.contributor.author	Petrichev, K	en_US
dc.contributor.author	Thorp, SJ	en_US
dc.contributor.editor	Lin, J	en_US
dc.date	2007-07-22	en_US
dc.date.issued	2007-01	en_US
dc.identifier.citation	Proceedings of the 11th Annual Conference of the Asia-Pacific Risk and Insurance Association, 2007, pp. 1 - 35	en_US
dc.identifier.uri	http://hdl.handle.net/10453/7629
dc.description.abstract	Governments around the world are reviewing basic pension systems in the light of increasing demands on public funds. In Australia, Government policy aims to in- crease reliance on private retirement savings and reduce demand on the targeted Age Pension. Using a new analytical valuation method for retirement income streams (Milevsky and Robinson 2005) we value the Age Pension by calculating the amount of wealth needed to sustain an annual draw-down equivalent to the Australian ba- sic pension, if pensioners were to be responsible for generating the income stream themselves. We account for both investment and longevity risk. A 65-year-old sin- gle retiree with average life-expectancy needs retirement wealth equivalent to 8.5 times average annual earnings to replicate the payments and insurance features of the public pension using standard draw-down products. Delaying retirement by 5 years reduces required savings by around 5%, but linking pension payments to earnings growth rather than price in.ation increases required wealth by up to 25%. Commercial single life annuities can replicate the pension more cheaply than the draw-down plans we evaluate, but remain unpopular with retirees. We conclude that the basic pension is very valuable, representing a large notional transfer of wealth at retirement.	en_US
dc.publisher	Asia-Pacific Risk and Insurance Association	en_US
dc.relation.ispartof	Proceedings of the 11th Annual Conference of the Asia-Pacific Risk and Insurance Association	en_US
dc.relation.ispartof	Annual Conference of the Asia-Pacific Risk and Insurance Association	en_US
dc.title	Valuing Basic Pensions	en_US
dc.type	Conference Proceeding
utslib.location	Taipei, Taiwan	en_US
utslib.location.activity	Taipei, Taiwan	en_US
utslib.for	1403 Econometrics	en_US
utslib.for	140207 Financial Economics	en_US
dc.location.activity	Taipei, Taiwan	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/DVC (Resources)
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Strength - CENSOC - Study of Choice
utslib.copyright.status	closed_access
pubs.consider-herdc	true	en_US
pubs.place-of-publication	Taipei, Taiwan	en_US
pubs.start-date	2007-07-22	en_US

Abstract:

Governments around the world are reviewing basic pension systems in the light of increasing demands on public funds. In Australia, Government policy aims to in- crease reliance on private retirement savings and reduce demand on the targeted Age Pension. Using a new analytical valuation method for retirement income streams (Milevsky and Robinson 2005) we value the Age Pension by calculating the amount of wealth needed to sustain an annual draw-down equivalent to the Australian ba- sic pension, if pensioners were to be responsible for generating the income stream themselves. We account for both investment and longevity risk. A 65-year-old sin- gle retiree with average life-expectancy needs retirement wealth equivalent to 8.5 times average annual earnings to replicate the payments and insurance features of the public pension using standard draw-down products. Delaying retirement by 5 years reduces required savings by around 5%, but linking pension payments to earnings growth rather than price in.ation increases required wealth by up to 25%. Commercial single life annuities can replicate the pension more cheaply than the draw-down plans we evaluate, but remain unpopular with retirees. We conclude that the basic pension is very valuable, representing a large notional transfer of wealth at retirement.

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http://hdl.handle.net/10453/7629