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Social Security Policy in a Changing Environment$
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Jeffrey R. Brown, Jeffrey B. Liebman, and David A. Wise

Print publication date: 2009

Print ISBN-13: 9780226076485

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226076508.001.0001

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Pricing Personal Account Benefit Guarantees

Pricing Personal Account Benefit Guarantees

A Simplified Approach

(p.229) 7 Pricing Personal Account Benefit Guarantees
Social Security Policy in a Changing Environment
Andrew Biggs

Clark Burdick

Kent Smetters

University of Chicago Press

This chapter demonstrates how a model for calculating the expected cost of a benefit guarantee can easily be modified to present the market price of personal account guarantees as a supplement to expected cost valuations. Personal accounts invested in equities will tend to increase average retirement benefits for workers choosing to participate. In proposals that allow for portfolio choice, it could be expected that inclusion of a benefit guarantee would alter the average portfolio allocation of account holders. Once an appropriate model is constructed to calculate the expected cost of a guarantee, a change of a single parameter of that model enables the analyst to calculate the risk neutral guarantee cost as well. From a practical perspective, the risk neutral guarantee costs allows for greater information to be provided to policymakers with relatively little additional research cost.

Keywords:   benefit guarantees, cost, personal accounts, account holders, risk neutral guarantee

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