Biggs - Pennacchi Comment

Pricing Personal Account Benefit Guarantees: A Simplified Approach by Andrew Biggs, Clark Burdick, and Kent Smetters Discussion by George G. Pennacchi Professor of Finance University of Illinois 1206 S. Sixth Street Champaign, Illinois 61820 Tel.: (217) 244-0952 Email: gpennacc@uiuc.edu This research was supported by the U.S. Social Security Administration through grant #10-P-98363-1-03 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the author and do not represent the views of SSA, any agency of the Federal Government, or the NBER.This paper by Andrew Biggs, Clark Burdick, and Kent Smetters makes two simple, but very important points. First, if one has a model that can compute the expected cost of a personal retirement account (PRA) guarantee, then with a couple of changes in parameter values, the model can also compute the market cost of the guarantee. Second, knowledge of the guarantee’s market cost is critical for determining sensible policy. I agree wholeheartedly with these two results. In these comments, I will offer more intuition for the paper’s findings and add arguments for why policy should be guided by market costs and not expected costs. I will close with some suggestions for improving estimates of the market cost of PRA guarantees. Biggs, Burdick, and ...