The Private Value of Public Pensions

Konstantin Petrichev and Susan Thorp ()

No 211, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Individual retirement savings accounts are replacing or supplementing public basic pensions. However at decumulation, replacing the public pension with an equivalent private sector income stream may be costly. We value the Australian basic pension by calculating the wealth needed to generate an equivalent payment stream using commercial annuities or phased withdrawals, but still accounting for investment and longevity risks. At age 65, a retiree needs an accumulation of about 8.5 years earnings to match the public pension in real value and insurance features. Increasing management fees by 1% raises required wealth by about one year's earnings. Delaying retirement by 5 years lowers required wealth by about one half year's earnings. Phased withdrawals have money's worth ratios close to 0.5 suggesting that private replacement costs are high.

Keywords: social security; longevity risk; phased withdrawal; stochastic present value (search for similar items in EconPapers)
JEL-codes: H55 J14 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-ias and nep-pub
Date: 2007-12-01
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Journal Article: The private value of public pensions (2008)
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