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Inflation Insurance for Australian Annuitants

Author

Listed:
  • Andrew Formica

    (AMP Society, 1–3 Alfred Street, Circular Quay NSW 2000.)

  • Geoffrey Kingston

    (Department of Economics University of New South Wales Kensington NSW 2033.)

Abstract

In the burgeoning market for immediate annuities, products offering payments escalated at a fixed rate of 5% per year have been greatly outselling their CPI-indexed counterparts, thanks to the lure of high early payments. Modifying recent analogies between inflation insurance of annuity streams and sequences of call options on synthetic CPI futures, we estimate the cost of insuring fixed-escalation annuity streams against prespecified drops in purchasing power. With such insurance, annuitants could enjoy reasonably high early payments without risking an inordinately low standard of living after some years of sustained high inflation, or towards the end of a long life.

Suggested Citation

  • Andrew Formica & Geoffrey Kingston, 1991. "Inflation Insurance for Australian Annuitants," Australian Journal of Management, Australian School of Business, vol. 16(2), pages 145-163, December.
    • Handle: RePEc:sae:ausman:v:16:y:1991:i:2:p:145-163
    DOI: 10.1177/031289629101600203
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    References listed on IDEAS

    as
    1. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    2. Bateman, H. & Frisch, J. & Kingston, G. & Piggott, J., 1990. "Demographics, Retirement Saving, And Superannuation Policy: An Australian Perspective," CEPR Discussion Papers 241, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    3. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    More about this item

    Keywords

    ANNUITIES; OPTIONS; CPI;
    All these keywords.

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