Life Cycle Implications of Money-Back Guarantees in Individual Retirement Accounts
Authors: Vanya Horneff (Goethe University), Daniel Liebler (Goethe University), Raimond Maurer (Goethe University), Olivia S. Mitchell (Wharton)
Title: Life Cycle Implications of Money-Back Guarantees in Individual Retirement Accounts
Abstract: In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in ways to protect households against retirement account volatility. Our work explores the consequences of implementing market-based retirement account guarantees for savers’ consumption patterns, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of the Riester plan system implemented in Germany in 2002, which have embedded mandatory money-back guarantees. Our life cycle model shows how these influence participants’ consumption, saving, and investment behavior in the higher interest rate environment of that era, compared to results in a low-return world such as the present. Interestingly, we find that abandoning these guarantees could enhance old-age consumption for over 75% of retirees both then and now, without harming consumption during the accumulation phase. Our results are robust to a variety of alternative settings.