IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/2463.html
   My bibliography  Save this paper

Personal pension plans and stock market volatility

Author

Listed:
  • Alier, Max
  • Vittas, Dimitri

Abstract

One of the strongest objections to personal pension plans is that they transfer investment risk to individual workers, who are then exposed to the vagaries of equity and bond markets. Using historical United States data, the authors investigate the impact of the volatility of investment returns on replacement rates in the context of personal pension plans. They find large fluctuations in replacement rates across different cohorts of workers, if undiversified portfolios are used. They then explore a number of simple financial strategies for coping with this problem, including: a) portfolio diversification; b) a late, gradual shift to bonds; c) a gradual purchase of nominal or real annuities; d) a purchase of variable annuities. The first three strategies lower the volatility of replacement rates, but at significant cost in terms of lower replacement rates. The purchase of variable annuities reduces the dispersion of replacementrates across generations without lowering their level - because of the persistence of the equity premium and the fact that the volatility of equity returns is lower, the longer the holding period. Sophisticated financial engineering promises more efficient solutions to this problem, but it may not be feasible to apply it in developing countries (or in developing financial markets). Neither authors'approach nor the more sophisticated financial engineering solutions would be able to deal effectively with persistent deviations of investment returns from long trends. But the authors'findings suggest that overconcern about the impact on replacement rates of short-term volatility in stock markets may not be warranted.

Suggested Citation

  • Alier, Max & Vittas, Dimitri, 2000. "Personal pension plans and stock market volatility," Policy Research Working Paper Series 2463, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2463
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2000/11/10/000094946_00102705541458/Rendered/PDF/multi_page.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. William N. Goetzmann & Philippe Jorion, 1997. "A Century of Global Stock Markets," NBER Working Papers 5901, National Bureau of Economic Research, Inc.
    2. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    3. Ravi Jagannathan & Narayana R. Kocherlakota, 1996. "Why should older people invest less in stock than younger people?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 20(Sum), pages 11-23.
    4. Valdes-Prieto, Salvador, 1998. "Risks in pensions and annuities : efficient designs," Social Protection Discussion Papers and Notes 20847, The World Bank.
    5. Salvador Valdés & Gonzalo Edwards, "undated". "Jubilación en los Sistemas Pensionales Privados," Documentos de Trabajo 182, Instituto de Economia. Pontificia Universidad Católica de Chile..
    6. Zvi Bodie, 2001. "Financial Engineering and Social Security Reform," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 291-320, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James, Estelle & Vittas, Dimitri, 2000. "Annuity markets in comparative perspective : do consumers get their money's wotrth?," Policy Research Working Paper Series 2493, The World Bank.
    2. Jeffrey R. Brown & Olivia S. Mitchell & James M. Poterba, 2000. "Mortality Risk, Inflation Risk, and Annuity Products," NBER Working Papers 7812, National Bureau of Economic Research, Inc.
    3. Anne Lavigne, 2006. "Gouvernance et investissement des fonds de pension privés aux Etats-Unis," Working Papers halshs-00081401, HAL.
    4. James Poterba & Steven Venti & David Wise, 2011. "The Composition and Drawdown of Wealth in Retirement," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 95-118, Fall.
    5. Yawen Hwang & Shihchieh Chang & Shuhan Yang, 2012. "Measuring the consequences of pension reform applying liquidation and longevity considerations," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 15(3), pages 243-255, September.
    6. Olivia S. Mitchell & James F. Moore, "undated". "Retirement Wealth Accumulation and Decumulation: New Developments and Outstanding Opportunities," Pension Research Council Working Papers 97-8, Wharton School Pension Research Council, University of Pennsylvania.
    7. Kedar-Levy, Haim, 2014. "The potential effect of US baby-boom retirees on stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 106-121.
    8. Steinorth, Petra, 2012. "The demand for enhanced annuities," Journal of Public Economics, Elsevier, vol. 96(11), pages 973-980.
    9. Monika Bütler & Federica Teppa, 2007. "The Choice between an Annuity and a Lump Sum: Results from Swiss Pension Funds," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1944-1966, National Bureau of Economic Research, Inc.
    10. Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, vol. 178(P3), pages 582-601.
    11. Jeff Dominitz & Angela Hung, 2006. "Retirement Savings Portfolio Management," Working Papers wp138, University of Michigan, Michigan Retirement Research Center.
    12. Goetzmann, William N. & Jorion, Philippe, 1999. "Re-Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(1), pages 1-32, March.
    13. Bronshtein, Gila & Scott, Jason & Shoven, John B. & Slavov, Sita Nataraj, 2020. "Leaving big money on the table: Arbitrage opportunities in delaying social security," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 261-272.
    14. Yaffa Machnes, 2003. "Stochastic Dominance of Pension Plans," Metroeconomica, Wiley Blackwell, vol. 54(1), pages 49-59, February.
    15. Cormac O'Dea & David Sturrock, 2019. "Survival pessimism and the demand for annuities," IFS Working Papers W19/02, Institute for Fiscal Studies.
    16. Arnaud Van Bellingen, 2007. "Quelles perspectives de développement pour le marché des annuités?," CREPP Working Papers 0701, Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège.
    17. Ilja Boelaars & Roel Mehlkopf, 2018. "Optimal risk-sharing in pension funds when stock and labor markets are co-integrated," DNB Working Papers 595, Netherlands Central Bank, Research Department.
    18. Roozbeh Hosseini & Ali Shourideh, 2019. "Retirement Financing: An Optimal Reform Approach," Econometrica, Econometric Society, vol. 87(4), pages 1205-1265, July.
    19. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
    20. Ralph S.J. Koijen & Stijn Nieuwerburgh & Motohiro Yogo, 2016. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Journal of Finance, American Finance Association, vol. 71(2), pages 957-1010, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2463. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.