Working Paper: NBER ID: w0442
Authors: Zvi Bodie
Abstract: This paper is organized as follows: The first part of the paper introduces the topic. In the next part, we explore the inadequacies of conventional and equity-based variable annuities in an inflationary environment by contrasting them with a hypothetical PPA. We then try to assess the suitability of money market instruments hedged with commodity futures as the asset base for PPA's, and consider the possibility of having financial institutions offer them to the public. The major conclusion of the paper is that private pension plans could offer retiring employees a choice between a conventional money-fixed annuity or a PPA, both of which would cost theemployer the same amount of money to fund, although this option would require the PPA benefitlevel in the first few years of retirement to be lower than that of the conventional annuity.
Keywords: purchasing power annuities; retirement income; inflation; financial innovation
JEL Codes: G23; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conventional annuities (G22) | deterioration of purchasing power (F31) |
| equity-based variable annuities (VAs) (G12) | unreliable hedge against inflation (G19) |
| purchasing power annuity (PPA) (H55) | predictable real income (D11) |
| asset base of PPAs (G32) | effectiveness of PPAs in maintaining purchasing power (E64) |