A straightforward guide focused on life cycle investing-namely aging, retirement, and pensions

Life cycle investing and the implications of aging, retirement, and pensions continues to grow in importance. With people living longer, the relative and absolute number of retirees is growing while the number of workers contributing to pension funds is declining.

This reliable resource develops a detailed economic analysis-at the micro (individual) and macro (economy wide) levels-which addresses issues regarding the economics of an aging population. Topics touched upon include retirement and the associated health care funding of the aged as well as social security and the asset classes that are considered asset-liability choices over time.

• The probability of achieving adequate return patterns from various investment strategies and asset classes is reviewed
• Shares rich insights on the aging, retirement, and pensions dilemma
• An assessment of the resources the real economy will be able to commit to non-workers is provided

The three pillars of retirement are social security, company pensions, and private savings. Each of these pillars is confronted with a variety of asset-liability problems, and this book will addresses them.

MARIDA BERTOCCHI is Professor of Portfolio Theory, University of Bergamo. She taught numerous courses at the Universities of Bergamo, Urbino and Milan, including basic and advanced calculus, mathematical finance, advanced mathematical finance, stochastic optimization, and parallel processing. Bertocchi has been Dean of the Faculty of Economics and Business Administration and is the Director of the Department of Mathematics, Statistics, Computer Science and Applications, University of Bergamo. She is the author of numerous publications on bond portfolio management, asset allocation, quantitative finance, and economic and financial applications.

SANDRA L. SCHWARTZ received her interdisciplinary PhD from the University of British Columbia in commerce, economics, and ecology. She has taught business policy, business and society, and topics in research and development and applied economics at Berkeley, UCLA, Tsukuba, UBC, and Simon Fraser. Schwartz designed programs and courses for the Open University of BC. She is the author of a number of books on energy policy, Japanese management and economy, and other topics, as well as numerous articles.

WILLIAM T. ZIEMBA is the Alumni Professor of Financial Modeling and Stochastic Optimization (Emeritus), University of British Columbia. He is a well-known academic with books, research articles, and talks on various investment topics and a columnist for Wilmott magazine. Ziemba has visited and lectured at MIT, University of Chicago, Berkeley, UCLA, Cambridge, LSE, Oxford, and the ICMA Centre. He trades through William T. Ziemba Investment Management Inc. He has consulted for various financial institutions including hedge funds, pension, and other investment institutions.

Praise for Optimizing the Aging, Retirement, and Pensions Dilemma

"Aging populations in developed nations raise many challenges, and capital markets will play a critical role in addressing them. This volume offers a coherent and concise introduction to the financial economic framework that will be vital for analyzing and ultimately resolving these challenges."
—James Poterba, Mitsui Professor of Economics, MIT, and President, National Bureau of Economic Research

"An impressive collection of ideas and information. This will be a valuable reference and resource for investors, advisors, and fiduciaries."
—Edward O. Thorp, Edward O. Thorp & Associates, author of Beat the Dealer and Beat the Market

Inhalt

Acknowledgments xv

Preface xvii

Part One The Aging Population: Issues for Retirement 1

Chapter 1 Issues in Retirement 3

1.1 Longevity and Changing Demographics across the World 4

1.2 The Evolution of Retirement 8

1.2.1 Older Workers as a Growing Share of the Work Force 11

1.3 Provision for Retirement 11

1.3.1 The Earliest Pensions 11

1.3.2 Early Corporate Pensions 12

1.3.3 Total Assets on Retirement 15

1.3.4 The Contribution of Various Assets at Retirement 15

References 19

Chapter 2 The Various Costs of Pensions: Macro and Micro 21

2.1 Governmental Cost of Retirement 21

2.2 Pensions and Capital Formation 22

2.3 Regulating Corporate Pensions 24

2.3.1 US Regulations 24

2.3.2 Corporate Bankruptcies Leave a Trail of Broken Promises 30

2.3.3 Comparing Regulation of Occupational Pension Schemes in the EU and the United States 31

2.4 DC vs. DB: Shifting the Risks 33

2.4.1 Pensions, Corporate Earnings, and Tax Deferral 37

2.5 Freezing Pension Plans 39

2.6 Where Do We Go from Here? 40

References 41

Chapter 3 The Various Pillars of Retirement: Social Security, Company Pensions, Supplementary Pensions, and Private Savings 43

3.1 Pillars of Retirement 43

3.2 Reforming OECD Pensions 51

3.3 Changing Role of Private Pensions 51

3.3.1 Summarizing Pension Reforms in the OECD 55

3.4 Plans for Reforming Social Pensions 56

3.4.1 Increase Contributions, Cut Benefits, Extend Working Life 56

3.4.2 Use the Contributions to Buy Stocks instead of Government Bonds 58

3.5 Rethinking Pension Promises: Breaking the Fixed Link to a Monetary Value 61

3.5.1 Feldstein's PRA with Guarantees 61

3.5.2 NDC: Notational or Nonfinancial Defined Contributions 62

3.5.3 The PAAW (Personal Annuitized Average Wage Security), a Variant of the NDC 66

3.6 Intergenerational Risk-Sharing 67

3.7 Conclusions 69

3.8 Case Study: Public Sector vs. Private Pensions 70

3.8.1 Government Plans Are Different: US 70

3.8.2 Government Plans Are Different: Canada 72

3.8.3 What Do We Learn from These Comparisons? 73

References 73

Chapter 4 Asset Classes: Historical Performance and Risk 77

4.1 Equities 77

4.2 ETFs: Exchange-Traded Funds 89

4.2.1 Levered ETFs 93

4.3 Bonds and Fixed Income 93

4.3.1 TIPS 95

4.4 The Bond-Stock Measure for Medium-Term Large Crash Prediction 95

4.4.1 The 2000-2003 Crash in the S&P 500 103

4.5 Hedge Funds 112

4.6 Real Assets 121

4.6.1 REITs 121

4.7 Housing as an Asset Class 121

4.8 Gold and Other Commodities 125

4.9 Private Equity and Related Assets 126

4.10 Currencies 126

4.11 Evaluation of Great Investors 129

4.12 Fundamental and Seasonal Anomalies of Asset Returns 135

References 141

Chapter 5 The Current Economic Crisis and Its Impact on Retirement Decisions 145

5.1 Household and Government Debt 145

5.2 Were the Crash Models Helpful in Signaling the US and Worldwide 2007-2009 Crash? 146

5.3 The Subprime Crisis and How It Evolved 148

5.3.1 Favoring the Financial Sector: Evaluating the Policy Responses 150

5.4 Impact on Retirement Expectations 153

5.4.1 Plan Sponsors in Trouble 156

5.5 Pensions in Trouble 160

5.6 State Pensions 161

5.7 Future ERP 162

5.7.1 Companies Freezing Pension Plans 165

5.7.2 The Ultimate Strategy: Bankruptcy 165

5.8 Future Inflation and Pensions 165

References 166

Part Two Special Issues and Models 169

Chapter 6 The Impact of Population Aging on Household Portfolios and Asset Returns 171

6.1 Introduction 171

6.2 The Empirical Evidence 172

6.2.1 The Empirical Evidence in a Micr…