Bridge over ocean
1 November 2005 Financial Analysts Journal Volume 61, Issue 6

Retirement Income Guarantees Are Expensive

  1. Don Ezra

Traditional defined-benefit pension plans depend on funding by employers to preserve the security of their income guarantees. The U.S. Social Security system depends on demographic stability. In both cases, security has proven to be elusive. In neither case does one find contingency reserves created in good times to help sustain security in bad times. Instead, society turns to defined-contribution arrangements, thereby throwing the risk onto individuals. Individuals have their own problems to cope with, however, involving uncertainty of both longevity and investment returns. The unsurprising lesson overall is: Eliminating risk is expensive.

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