Working Paper: NBER ID: w26406
Authors: Vanya Horneff; Daniel Liebler; Raimond Maurer; Olivia S. Mitchell
Abstract: Capital market volatility spurs interest in protecting retirement accounts; one such approach is to require money-back guarantees. Using a lifecycle model where investors have access to stocks, bonds, and tax-qualified retirement accounts, we show that such guarantees alter participant consumption, saving, and investment behavior during times of high interest rates, but impacts are even larger in a low-return environment. We conclude that abandoning guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming pre-retirement consumption. Our results are of interest for default investment options in individual retirement accounts such as the Pan-European Personal Pension Products.
Keywords: Moneyback Guarantees; Individual Retirement Accounts; Consumption Behavior; Saving Behavior; Investment Behavior
JEL Codes: D14; D91; G11; G52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| moneyback guarantees (H81) | pre-retirement consumption (D15) |
| moneyback guarantees (H81) | post-retirement consumption (D15) |
| low-interest environment (E43) | costs of guarantees outweigh benefits (H81) |
| costs of guarantees outweigh benefits (H81) | lower old-age consumption (D15) |
| eliminating guarantees (D52) | enhance old-age consumption (D15) |
| age-based lifecycle investment strategy (G11) | better outcomes than moneyback guarantees (H81) |
| abolishing moneyback guarantees (L42) | improve financial well-being for retirees (G51) |