Saturday, February 1, 2014

"What I would really like is what state government workers get"

P.G. with a great observation,

"What I would really like is what state government workers get, i.e., a pension that starts sending me monthly checks when I turn 65 years old and adjusts those checks to account for inflation. So far I haven’t found a product like that. Does it truly not exist? If so, it is interesting that Detroit thought that they could provide this to their workers without going bankrupt. If Goldman Sachs and the rest of the Wall Street geniuses can’t figure out how such a product should be priced, why did states and cities think that they could do what the world’s most sophisticated financial services industry could not?"
What he's looking for is called a "delayed annuity" or "longevity insurance". And it's not so much that it's hard to price, it's that it takes a gigantic amount of money set aside now - given low interest rates and dividend yields - to be able to offer much of a perpetual monthly income.

These big companies and cities and states overpaid their workers.

P.S. The decision whether to buy a delayed annuity now or wait is a bet on interest rates. If the ten year yield is going to go to 50 basis points like Japan, the amount of guaranteed monthly income per dollar paid today will fall.

1 comment:

Taylor Conant said...


"It disgusts me that you'd try to put a price on the value of another human being, sir."