Pricing Personal Account Benefit Guarantees: A Simplified Approach

A number of proposals to introduce personal accounts to the Social Security program contain provisions that would guarantee account-holders against relatively poor investment performance that would make their total benefits fall below the level scheduled under current law. Presently, most policy focus is placed on the expected cost of such guarantees, as few estimates are published evaluating the potential market cost of insuring against the associated risk. This paper demonstrates how a simple modification of parameter inputs used to calculate the expected cost of guarantees would allow analysts to estimate the market cost of the underlying risk.