Optimizing the Aging, Retirement, and Pensions Dilemma (Wiley Finance)

432 Pages·2010·4.43 MB·English

by  Marida Bertocchi

$75.00 USA/$90.00 CAN
(continued from front flap)
Bertocchi
modeling framework. While complex to implement,
Schwartz
such models provide a good way to plan and take
various future scenarios into account in these un-
Ziemba
certain, ever-changing times.
P
lanning for retirement is one of those issues
MARIDA BERTOCCHI is Professor of Portfolio that can be summarized in the observation
Theory, University of Bergamo. She taught numerous that there is both good news and bad news:
aO
courses at the Universities of Bergamo, Urbino the good news is that we are living longer, the bad
and Milan, including basic and advanced calculus, np news is that we have to pay for it. As we recover from
mathematical finance, advanced mathematical dt the worst economic crisis since the 1930s—with
fi nance, stochastic optimization, and parallel large losses in pensions, incomes, and savings—
i
processing. Bertocchi has been Dean of the Faculty Pm we fi nd that old adages like “stocks for the long run”
of Economics and Business Administration and is and the safety of index and exchange traded funds
the Director of the Department of Mathematics, ei Optimizing have not worked to protect asset values.
Statistics, Computer Science and Applications, nz
University of Bergamo. She is the author of numerous Praise for sin the Ensuring suffi cient resources for retirement en-
publications on bond portfolio management, asset Optimizing the Aging, Retirement, compasses a complex set of decisions involving tax
i
allocation, quantitative fi nance, and economic and og issues, assumptions on future salaries and poten-
fi nancial applications. tial loss with change of jobs, asset allocation for
and Pensions Dilemma n
t defi ned contribution pension plans, longevity, in-
SANDRA L. SCHWARTZ received her interdisci- sh terest rates, infl ation, and, on retirement, whether
Aging, Retirement,
plinary PhD from the University of British Colum- e to buy an annuity—all in the face of changing
bia in commerce, economics, and ecology. She has “Aging populations in developed nations raise many challenges, D demographics and social factors. Each of these

taught business policy, business and society, and and capital markets will play a critical role in addressing them. This iA issues requires careful individual decision making
topics in research and development and applied l in the face of increasing risk.
volume offers a coherent and concise introduction to the fi nancial eg
economics at Berkeley, UCLA, Tsukuba, UBC, and
Simon Fraser. Schwartz designed programs and economic framework that will be vital for analyzing and ultimately mi Written in a straightforward and accessible
courses for the Open University of BC. She is the n and Pensions style, this book offers valuable advice on today’s
resolving these challenges.”
author of a number of books on energy policy, Japa- mg toughest retirement issues, and shows how gov-
nese management and economy, and other topics, James Poterba , ernment and corporate entities can help while
as well as numerous articles. Mitsui Professor of Economics, MIT, and President, a assessing the risks to their own balance sheets.
R
It also addresses some of the macroeconomic
National Bureau of Economic Research
WILLIAM T. ZIEMBA is the Alumni Professor of e issues, asking whether an economy can effectively
Financial Modeling and Stochastic Optimization Dilemma save without investing in productive assets.
t
(Emeritus), University of British Columbia. He is a
“An impressive collection of ideas and information. This will be a valuable i
well-known academic with books, research articles, r The authors begin by exploring the key issues in
and talks on various investment topics and a reference and resource for investors, advisors, and fi duciaries.” e retirement, including changing demographics and
columnist for Wilmott magazine. Ziemba has visited the shift from defi ned benefi t to defi ned contribu-
m
and lectured at MIT, University of Chicago, Berkeley, Edward O. Thorp tion plans. They discuss various asset classes and
UCLA, Cambridge, LSE, Oxford, and the ICMA Centre. Edward O. Thorp & Associates, e how they might be used for saving for retirement.
He trades through William T. Ziemba Investment The authors analyze the 2007–2009 economic cri-
Management Inc. He has consulted for various author of Beat the Dealer and Beat the Market n Marida Bertocchi Sandra L. Schwartz William T. Ziemba sis and its impact on retirement assets and future
fi nancial institutions including hedge funds, pension, t retirement practice. In Part II, they offer more in-
and other investment institutions. , depth analyses of key issues, such as asset allo-
cation in government-owned pensions, individual
asset-liability management and the role of annui-
ties, insurance, and managed withdrawal plans,
and more. Finally, in Part III, they bring the various
issues together to present an all-encompassing
(continued on back flap)
EAN: 9780470377345
ISBN 978-0-470-37734-5
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Optimizing the Aging,
Retirement, and
Pensions Dilemma
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Optimizing the Aging,
Retirement, and
Pensions Dilemma
MARIDA BERTOCCHI
SANDRA L. SCHWARTZ
WILLIAM T. ZIEMBA
John Wiley & Sons, Inc.
iii
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Copyright(cid:1)C 2010byMaridaBertocchi,SandraL.Schwartz,andWilliamT.Ziemba.
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LibraryofCongressCataloging-in-PublicationData:
Bertocchi,Marida.
Optimizingtheaging,retirement,andpensionsdilemma/MaridaBertocchi,
SandraL.Schwartz,WilliamT.Ziemba.
p.cm.–(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-37734-5(cloth)
1.Retirement–Economicaspects. 2.Retirementincome–Planning. 3.Pensions.
I.Schwartz,S.L.(SandraL.),1943– II.Ziemba,W.T. III.Title.
HD7105.3.B4752010
332.024(cid:2)014–dc22
2009031715
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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To my nieces and nephews
—Marida
To Rachel who makes us so proud, and to Ruth
who lives the social security dream
—Bill and Sandra
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Contents
Acknowledgments xv
Preface xvii
PARTONE
TheAgingPopulation:IssuesforRetirement 1
CHAPTER1
IssuesinRetirement 3
1.1 LongevityandChangingDemographicsacrosstheWorld 4
1.2 TheEvolutionofRetirement 8
1.2.1 OlderWorkersasaGrowingShareofthe
WorkForce 11
1.3 ProvisionforRetirement 11
1.3.1 TheEarliestPensions 11
1.3.2 EarlyCorporatePensions 12
1.3.3 TotalAssetsonRetirement 15
1.3.4 TheContributionofVariousAssetsatRetirement 15
References 19
CHAPTER2
TheVariousCostsofPensions:MacroandMicro 21
2.1 GovernmentalCostofRetirement 21
2.2 PensionsandCapitalFormation 22
2.3 RegulatingCorporatePensions 24
2.3.1 USRegulations 24
2.3.2 CorporateBankruptciesLeaveaTrailof
BrokenPromises 30
2.3.3 ComparingRegulationofOccupational
PensionSchemesintheEUandtheUnitedStates 31
2.4 DCvs.DB:ShiftingtheRisks 33
2.4.1 Pensions,CorporateEarnings,andTaxDeferral 37
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viii CONTENTS
2.5 FreezingPensionPlans 39
2.6 WhereDoWeGofromHere? 40
References 41
CHAPTER3
TheVariousPillarsofRetirement:SocialSecurity,Company
Pensions,SupplementaryPensions,andPrivateSavings 43
3.1 PillarsofRetirement 43
3.2 ReformingOECDPensions 51
3.3 ChangingRoleofPrivatePensions 51
3.3.1 SummarizingPensionReformsintheOECD 55
3.4 PlansforReformingSocialPensions 56
3.4.1 IncreaseContributions,CutBenefits,Extend
WorkingLife 56
3.4.2 UsetheContributionstoBuyStocksinstead
ofGovernmentBonds 58
3.5 RethinkingPensionPromises:BreakingtheFixed
LinktoaMonetaryValue 61
3.5.1 Feldstein’sPRAwithGuarantees 61
3.5.2 NDC:NotationalorNonfinancial
DefinedContributions 62
3.5.3 ThePAAW(PersonalAnnuitizedAverage
WageSecurity),aVariantoftheNDC 66
3.6 IntergenerationalRisk-Sharing 67
3.7 Conclusions 69
3.8 CaseStudy:PublicSectorvs.PrivatePensions 70
3.8.1 GovernmentPlansAreDifferent:US 70
3.8.2 GovernmentPlansAreDifferent:Canada 72
3.8.3 WhatDoWeLearnfromTheseComparisons? 73
References 73
CHAPTER4
AssetClasses:HistoricalPerformanceandRisk 77
4.1 Equities 77
4.2 ETFs:Exchange-TradedFunds 89
4.2.1 LeveredETFs 93
4.3 BondsandFixedIncome 93
4.3.1 TIPS 95
4.4 TheBond-StockMeasureforMedium-TermLarge
CrashPrediction 95
4.4.1 The2000–2003CrashintheS&P500 103