Guaranteeing Defined Contribution Pensions: The Option to Buy-Back a Defined Benefit Promise / Marie-Eve Lachance, Olivia S. Mitchell.

Format:

Book

Author/Creator:

Lachance, Marie-Eve.

Contributor:

National Bureau of Economic Research.

Mitchell, Olivia S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8731.

NBER working paper series no. w8731

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Guaranteeing Defined Contribution Pensions

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

After a long commitment to defined benefit (DB) pension plans for US public sect or employees, many state legislatures have introduced defined contribution (DC) plans for their public employees. In this process, investment risk which was previously borne by state DB plans has now devolved to employees covered by the new DC plans. In light of this trend, some states have proposed a guarantee mechanism to help protect DC plan participants. One such guarantee takes the form of an option permitting DC plan participants to bu y back their DB benefit for a price. This paper develops a theoretical framewor k to analyze the option design and illustrate how employee characteristics influ ence the option's cost. We illustrate the potential magnitude of a buy-back opt ion value enacted recently by the State of Florida for its public employees. If employees were to exercise the buy-back option optimally, the market value of t his option could represent up to 100 percent of the DC contributions over the wo rklife.

Notes:

Print version record

January 2002.