Optimizing the Aging, Retirement, and Pensions Dilemma (Wiley Finance Series) / Edition 1

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Planning for retirement is one of those issues that can besummarized in the observation that there is both good news and badnews: the good news is that we are living longer, the bad news isthat we have to pay for it. As we recover from the worst economiccrisis since the 1930s—with large losses in pensions, incomes,and savings—we find that old adages like "stocks for the longrun" and the safety of index and exchange traded funds have notworked to protect asset values.

Ensuring sufficient resources for retirement encompasses acomplex set of decisions involving tax issues, assumptions onfuture salaries and potential loss with change of jobs, assetallocation for defined contribution pension plans, longevity,interest rates, inflation, and, on retirement, whether to buy anannuity—all in the face of changing demographics and socialfactors. Each of these issues requires careful individual decisionmaking in the face of increasing risk.

Written in a straightforward and accessible style, this bookoffers valuable advice on today's toughest retirement issues, andshows how government and corporate entities can help whileassessing the risks to their own balance sheets. It also addressessome of the macroeconomic issues, asking whether an economy caneffectively save without investing in productive assets.

The authors begin by exploring the key issues in retirement,including changing demographics and the shift from defined benefitto defined contribution plans. They discuss various asset classesand how they might be used for saving for retirement. The authorsanalyze the 2007–2009 economic crisis and its impact onretirement assets and future retirement practice. In Part II, theyoffer more in-depth analyses of key issues, such as assetallocation in government-owned pensions, individual asset-liabilitymanagement and the role of annuities, insurance, and managedwithdrawal plans, and more. Finally, in Part III, they bring thevarious issues together to present an all-encompassing modelingframework. While complex to implement, such models provide a goodway to plan and take various future scenarios into account in theseuncertain, ever-changing times.

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What People Are Saying

From the Publisher
"The economic and financial challenges faced by most countries in relation of their aging population are enormous. This book provides a lot of interesting insights on the retirement problem, and provides fuel to think about solutions to it in the most intelligent way. Many things can go really bad if things are not managed efficiently on this matter. By reading the articles gathered by Ziemba in this book, some of these horrible prospects could be escaped."
Christian Gollier, Director of the Toulouse School of Economics, Researcher at LERNA/TSE (Research Center in Environmental Economics)
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Product Details

  • ISBN-13: 9780470377345
  • Publisher: Wiley
  • Publication date: 2/8/2010
  • Series: Wiley Finance Series, #477
  • Edition number: 1
  • Pages: 411
  • Product dimensions: 6.00 (w) x 9.00 (h) x 1.60 (d)

Meet the Author

Marida Bertocchi is Professor of Portfolio Theory,University of Bergamo. She taught numerous courses at theUniversities of Bergamo, Urbino and Milan, including basic andadvanced calculus, mathematical finance, advanced mathematicalfinance, stochastic optimization, and parallel processing.Bertocchi has been Dean of the Faculty of Economics and BusinessAdministration and is the Director of the Department ofMathematics, Statistics, Computer Science and Applications,University of Bergamo. She is the author of numerous publicationson bond portfolio management, asset allocation, quantitativefinance, and economic and financial applications.

Sandra L. Schwartz received her interdisciplinary PhDfrom the University of British Columbia in commerce, economics, andecology. She has taught business policy, business and society, andtopics in research and development and applied economics atBerkeley, UCLA, Tsukuba, UBC, and Simon Fraser. Schwartz designedprograms and courses for the Open University of BC. She is theauthor of a number of books on energy policy, Japanese managementand economy, and other topics, as well as numerous articles.

William T. Ziemba is the Alumni Professor of FinancialModeling and Stochastic Optimization (Emeritus), University ofBritish Columbia. He is a well-known academic with books, researcharticles, and talks on various investment topics and a columnistfor Wilmott magazine. Ziemba has visited and lectured at MIT,University of Chicago, Berkeley, UCLA, Cambridge, LSE, Oxford, andthe ICMA Centre. He trades through William T. Ziemba InvestmentManagement Inc. He has consulted for various financial institutionsincluding hedge funds, pension, and other investmentinstitutions.

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Table of Contents



PART ONE The Aging Population: Issues for Retirement.

CHAPTER 1 Issues in Retirement.

1.1 Longevity and Changing Demographics across the World.

1.2 The Evolution of Retirement.

1.3 Provision for Retirement.


CHAPTER 2 The Various Costs of Pensions: Macro andMicro.

2.1 Governmental Cost of Retirement.

2.2 Pensions and Capital Formation.

2.3 Regulating Corporate Pensions.

2.4 DC vs. DB: Shifting the Risks.

2.5 Freezing Pension Plans.

2.6 Where Do We Go from Here?


CHAPTER 3 The Various Pillars of Retirement: Social Security,Company Pensions, Supplementary Pensions, and PrivateSavings.

3.1 Pillars of Retirement.

3.2 Reforming OECD Pensions.

3.3 Changing Role of Private Pensions.

3.4 Plans for Reforming Social Pensions.

3.5 Rethinking Pension Promises: Breaking the Fixed Link to aMonetary Value.

3.6 Intergenerational Risk-Sharing.

3.7 Conclusions.

3.8 Case Study: Public Sector vs. Private Pensions.


CHAPTER 4 Asset Classes: Historical Performance andRisk.

4.1 Equities.

4.2 ETFs: Exchange-Traded Funds.

4.3 Bonds and Fixed Income.

4.4 The Bond-Stock Measure for Medium-Term Large CrashPrediction.

4.5 Hedge Funds.

4.6 Real Assets.

4.7 Housing as an Asset Class.

4.8 Gold and Other Commodities.

4.9 Private Equity and Related Assets.

4.10 Currencies.

4.11 Evaluation of Great Investors.

4.12 Fundamental and Seasonal Anomalies of Asset Returns.


CHAPTER 5 The Current Economic Crisis and Its Impact onRetirement Decisions.

5.1 Household and Government Debt.

5.2 Were the Crash Models Helpful in Signaling the US andWorldwide 2007–2009 Crash?

5.3 The Subprime Crisis and How It Evolved.

5.4 Impact on Retirement Expectations.

5.5 Pensions in Trouble.

5.6 State Pensions.

5.7 Future ERP.

5.8 Future Inflation and Pensions.


PART TWO Special Issues and Models.

CHAPTER 6 The Impact of Population Aging on HouseholdPortfolios and Asset Returns.

6.1 Introduction.

6.2 The Empirical Evidence.

6.3 Models for Portfolio Choices and Life-Cycle AssetAllocations.

6.4 Conclusions.


CHAPTER 7 A Continuous Time Approach to Asset-LiabilitySurplus Management.

7.1 The Rudolf-Ziemba (2004) Intergenerational SurplusManagement Model.

7.2 A Case Study Application of the Rudolf-Ziemba Model.


CHAPTER 8 Should Defined Benefit Pension Schemes Be CareerAverage or Final Salary?

8.1 Introduction.

8.2 Career Average Defined Benefit Schemes.

8.3 Cost Neutrality.

8.4 Choosing the Revaluation Rate.

8.5 The Adoption of Career Average Pension Schemes.

8.6 Advantages of a Switch to a Career Average Scheme.

8.7 Disadvantages of a Switch to a Career Average Scheme.

8.8 Redistribution Effects of a Switch to Career AveragePensions.

8.9 Conclusions.


CHAPTER 9 Applying Stochastic Programming to the US DefinedBenefit Pension System.

9.1 Introduction.

9.2 Integrated Corporate/Pension Planning Model.

9.3 Assisting the Defined Benefit Pension System.

9.4 Conclusions.


CHAPTER 10 Mortality-Linked Securities andDerivatives.

10.1 Introduction.

10.2 Longevity Risk Transfers.

10.3 Capital Market Solutions and the Development ofMortality-Linked Securities and Derivatives.

10.4 Recent Trends in Mortality-Linked Securities.

10.5 Hedging Pension Liabilities with Mortality-LinkedSecurities and Derivatives.

10.6 Conclusion.


CHAPTER 11 Asset Allocation and Governance Issues ofGovernment-Owned Pensions.

11.1 Introduction.

11.2 Types of Sovereign Funds.

11.3 Is There a Common Asset Allocation for Pension Funds?

11.4 Sovereign Pension Funds and International CapitalMarkets.

11.5 Governance Issues of Public Pension Funds.

11.6 Regional Trends.

11.7 Conclusion.


CHAPTER 12 Issues in Individual Asset-Liability Managementfor Retirement.

12.1 Own Company Stock.

12.2 The Role of Annuities.

12.3 The Role of Insurance.

12.4 The Role of Managed Withdrawal Plans.

12.5 Where and How to Retire?


PART THREE Modeling the Issues.

CHAPTER 13 Learning from Other Models.

13.1 Preserving Endowment Spending.

13.2 Devising a Rule So That Spending Never Falls.


CHAPTER 14 The Innovest Austrian Pension Fund FinancialPlanning Model.

14.1 How Should Companies Fund Their Liabilities and DetermineAllocations among Asset Classes and Hedging Instruments?

14.2 Formulating InnoALM as a Multistage Stochastic LinearProgramming Model.

14.3 Some Typical Applications.

14.4 Some Test Results.

14.5 Model Tests.


CHAPTER 15 An Individual ALM Model for LifetimeAsset-Liability Management.


CHAPTER 16 Implementation and Numerical Results of IndividualALM Model for Lifetime Asset-Liability Management.


CHAPTER 17 Conclusions.


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