Dr. Warshawsky reviews and comments on the paper by Brown, Mitchell and Poterba (BMP) which collects interesting institutional information and empirical evidence concerning the operation of, and pricing in, nominal and inflation-indexed individual annuity markets in the UK and the US. They also present empirical evidence on the historical correlation of inflation and the nominal returns on the main US asset classes. Finally, BMP show simulation results of an expected utility model estimating the relative benefits of different annuity types, including nominal fixed, inflation-indexed, and equity-indexed variable payouts, in two inflation regimes &em; independently distributed and a persistent process. By presenting in one location different types of information, empirical evidence, and simulation modeling, this paper is extremely useful, in the view of Dr. Warshawsky, to current policy discussions regarding both individual account proposals for Social Security reform and pension plan design. The modeling of the inflation environment is quite novel and sophisticated. Warshawsky"s comments follow the flow of the paper touching on most of its parts, but focuses mainly on the broad question of the investor demand for inflation indexation in annuity products.
