The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program

Jeffrey R. Brown, Olivia S. Mitchell, James M. Poterba

NBER Working Paper No. 7005
Issued in March 1999
NBER Program(s):Public Economics, Economics of Aging

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.

download in pdf format
   (219 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7005

Published: The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program, Jeffrey R. Brown, Olivia S. Mitchell, James M. Poterba. in Risk Aspects of Investment-Based Social Security Reform, Campbell and Feldstein. 2001

Users who downloaded this paper also downloaded* these:
Brown, Mitchell, and Poterba The Role of Real Annuities and Indexed Bonds in an Individual Accounts Retirement Program
Brown, Mitchell, and Poterba w7812 Mortality Risk, Inflation Risk, and Annuity Products
Brown and Poterba w7199 Joint Life Annuities and Annuity Demand by Married Couples
Brown, Mitchell, Poterba, and Warshawsky w7268 Taxing Retirement Income: Nonqualified Annuities and Distributions from Qualified Accounts
Dus, Maurer, and Mitchell w11271 Betting on Death and Capital Markets in Retirement: A Shortfall Risk Analysis of Life Annuities
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us