TY - JOUR AU - Brown,Jeffrey R. AU - Mitchell,Olivia S. AU - Poterba,James M. TI - The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program JF - National Bureau of Economic Research Working Paper Series VL - No. 7005 PY - 1999 Y2 - March 1999 UR - http://www.nber.org/papers/w7005 L1 - http://www.nber.org/papers/w7005.pdf N1 - Author contact info: Jeffrey R. Brown Department of Finance University of Illinois at Urbana-Champaign 515 East Gregory Drive Champaign, IL 61820 Tel: 217/333-3322 E-Mail: brownjr@illinois.edu Olivia S. Mitchell University of Pennsylvania Wharton School 3620 Locust Walk, St 3000 SH-DH Philadelphia, PA 19104-6302 Tel: 215-898-0424 Fax: 215/898-0310 E-Mail: mitchelo@wharton.upenn.edu James M. Poterba Department of Economics MIT, E52-350 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/253-6673 Fax: 617/258-7804 E-Mail: poterba@nber.org M1 - published as Jeffrey R. Brown, Olivia S. Mitchell, James M. Poterba. "The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program," in John Y. Campbell and Martin Feldstein, editors, "Risk Aspects of Investment-Based Social Security Reform" University of Chicago Press (2001) AB - We explore four issues concerning annuitization options that retirees might use in the decumulation phase of an individual accounts' retirement saving system. First, we investigate the operation of both real and nominal annuity individual annuity markets in the United Kingdom. The widespread availability of real annuities in the U.K. dispels the argument that private insurance markets could not, or would not, provide real annuities to retirees. Second, we consider the current structure of two inflation-linked insurance products available in the United States, only one of which proves to be a real annuity. Third, we evaluate the potential of assets such as stocks, bonds, and bills, to provide retiree protection from inflation. Because equity real returns have been high over the last seven decades, a retiree who received income linked to equity returns would have fared very well on average. Nevertheless we cast doubt on the inflation insurance' aspect of equity, since this is mainly due to stocks' high average return, and not because stock returns move in tandem with inflation. Finally, we use a simulation model to assess potential retiree willingness to pay for real, nominal, and variable payout equity-linked annuities. For plausible degrees of risk aversion, inflation protection appears to have only modest value. People would be expected to value a variable payout equity-linked annuity more highly than a real annuity because the additional real returns associated with common stocks more than compensate for the volatility of prospective payouts. These finding are germane to concerns raised in connection with Social Security reform plans that include individual accounts. ER -