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Valuing Pensions (Annuities) with Different Types of Inflation Protection in Total Compensation Comparisons

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  • James E. Pesando

Abstract

Pensions provided in the public sector are often indexed, while pensions in the private sector typically are not. To conduct the total compensation comparisons that ostensibly guide government pay policy, one must value annuities which differ in their degree of inflation protection. This paper conducts this exercise from the viewpoint of modem finance theory, and contrasts the results with those of a representative government, the Government of Canada. The results suggest that governments may typically understate the value of indexed pensions and overstate the value of pensions which receive incomplete inflation protection. A contributing factor is the apparent belief that standardizing actuarial assumptions is sufficient to ensure comparability, in spite of the fact that risk is ignored and that interest rate and inflation assumptions are typically not those of the market.

Suggested Citation

  • James E. Pesando, 1982. "Valuing Pensions (Annuities) with Different Types of Inflation Protection in Total Compensation Comparisons," NBER Working Papers 0956, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0956
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    1. Martin Feldstein, 1983. "Should Private Pensions Be Indexed?," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 211-230, National Bureau of Economic Research, Inc.
    2. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-470, May.
    3. Pesando, James E, 1984. "Employee Evaluation of Pension Claims and the Impact of Indexing Initiatives," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 1-17, January.
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    Cited by:

    1. Danzer, Alexander M. & Dolton, Peter J., 2012. "Total Reward and pensions in the UK in the public and private sectors," Labour Economics, Elsevier, vol. 19(4), pages 584-594.
    2. Rita K. Almeida & Z. Bilgen Susanlı, 2012. "Firing Regulations and Firm Size in the Developing World: Evidence from Differential Enforcement," Review of Development Economics, Wiley Blackwell, vol. 16(4), pages 540-558, November.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    4. Danzer, Alexander M. & Dolton, Peter, 2011. "Total Reward in the UK in the Public and Private Sectors," IZA Discussion Papers 5656, Institute of Labor Economics (IZA).

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