A Framework for Analyzing Defined Benefit Pension Insurance: The Survivor Benefit Plan for Veterans
By William W. Jennings (U.S. Air Force Academy – Department of Management), Jeff Merrell (University of Colorado at Boulder – Leeds School of Business) Thomas O’Malley (U.S. Air Force Academy – Department of Management) & Brian Payne (US Air Force Academy)
Millions of defined benefit pensioners must select a pension insurance method. We present a framework for making this decision within the context of US military veterans’ Survivor Benefit Plan (SBP). Federal government subsidies generate a positive expected net payout for SBP. While insurance outcomes are typically skewed, the asymmetry of SBP outcomes is stark. In a common scenario, 5% (95%) of participants receive 60% (40%) of benefits. An alternative approach incorporates private insurance and investments and often bests the SBP. Actuarially-correct life expectancy, moral hazard, taxes, and individual financial needs all play important roles in selecting a pension insurance program.
Source; SSRN
