ABSTRACT
This chapter discusses the nature of the uncertainty about how long retirees will live and what will happen to wage and price levels after they retire and explores the approaches that can be taken for dealing with the sources of uncertainty. Privately managed, defined benefit pension plans almost always offer monthly benefits throughout the remaining life of the retiree, at least as an option. The challenge of producing a continuing, regular retirement income throughout a person’s retirement years is the greatest in the case of retirement programs that follow the individual savings model. The commitment to index a bond, particularly one which trades on the open market, is likely to be more difficult to alter than is the commitment to index retirement benefits in a pay-as-you-go pension system. Planning for retirement requires dealing with two major sources of uncertainty, unexpected inflation and uncertain lifespans.
