Equity Indexed Ideas for Formal Systems of Old Age Security

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Vlad Sachelarie~Tim Connolly, United-States
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Summary:
The current US Social Security System cannot deal with the changes in the demographics of the baby-boom type. A pay-as-you-go system in general is not well suited to deal with the issues of an exploding retiree population and a stagnant working population. Our paper offers a solution in the form of a new system based on the three classic designs found in the equity indexed annuity market: the “point-to-point” design, the “annual reset” design, and the “continuous lookback” design. This will be a defined contribution plan design with various adjustments to alleviate some of the problems inherent to such models. These adjustments include: an independent agency decides how and where the investments go, relieving the people of their investments duties; the investment rate of return will be tied to the return on a wide ranging market index such as Wilshire5000; and there will be a minimum guaranteed rate of return that will be credited when the index is below this threshold. Our paper shows that the new system exhibits very good replacement ratios, no intra-generational conflict, flexibility in dealing with changing demographics, and minimum risk of ever being insolvent. There will be high costs associated with the move to a new system, but the costs of doing nothing would be a lot higher.
 
Date: 30 May - Time: 10:30 to 12:00 - Room: 253
Theme: 3.A. Actuarial problems related to the retirement of the baby-boom