Evaluating Money’s Worth and Expected Rates of Return in Housing Pension Program

Abstract

Since housing pension providers do not disclose any comparative indicators such as costs or returns, consumers can not have any information to use as a reference when they want to compare housing pension with other pension plans such as an immediate annuity. This study evaluated the money's worth(MW) as a comparative indicator related to the return of the housing pension and confirmed the change in the size of the MW of the housing pension over time. The MW of an annuity is defined as the ratio of the expected discounted value of its future payments to its initial purchase price. Then, as another new comparative indicator, the expected rates of return of the housing pension was evaluated, and the change in the size of the expected rates of return over time was confirmed. Finally, the value of the rental rates of return of housing pensioners was also evaluated, because it can be considered that housing pensioners are generating invisible returns as much as the size of the rent through the use of the housing pension. As a result of our analysis, it was confirmed that the values of MW at the early stage showed less than 1.0 but as time went on, they showed values larger than 1.0. Regardless of age group, all the values of MW evaluated at the time point of life expectancy showed smaller than 1.0. Meanwhile, it was also confirmed that the expected rates of return show very large negative values at the early stage, but, later the values reversed to positive values and continued to increase. Finally, the rental rates of return of the housing pensioners were evaluated to have rates of return similar to that of the immediate annuity. The results of the analysis in this study are expected to help consumers choose reasonable pension products by making it possible to compare expected rates of return (or MW) in housing pension with those of other pension products.