Richard Thaler, Nobel laureate and professor of behavioral science and economics at the University of Chicago’s Booth School of Business, has proposed an interesting concept, allowing workers to use accumulated retirement assets to “buy” more social security benefits.
A number of actuaries and financial planners have written about the challenges facing retirees in a defined contribution world. How much can be spent safely without incurring too much “longevity risk,” the risk that you outlive your money. The research seems to indicate that either by annuitizing a portion of your accumulated savings or by purchasing a longevity annuity (which provides income after attaining a certain age) participants can materially reduce the risk to their retirement savings.
Despite the academic evidence, annuitization remains an unpopular benefit payment option for defined contribution plans. One theory as to why annuitization remains unpopular is agency risk, the risk that the person promoting the annuity may be doing so to benefit themselves more than the investor.
The insurance industry has earned skepticism regarding annuity sales practices. The National Association of Insurance Commissioners (NAIC) issued a Consumer Alert related to the sale of annuitizes to senior citizens, and a web search of “annuity sales fraud” will give you several months of reading.
Both the retirement plan industry and the insurance industry have quickly stepped up to call the idea heresy. I’ve written recently about the relatively untapped world of annuity sales to defined contribution plans and how important complementary sales are to firms providing recordkeeping and administration services to retirement plans. Given that push, criticism from organizations with the most to “lose” should be expected.
However, the private defined contribution system continues to suffer two material flaws, coverage and income generation. State governments are moving rapidly to improve coverage by mandating state savings plans for small employers. An opt-in annuitization program managed by social security seems a sensible and practical option for further study, and one that could potentially improve retiree financial wellness materially.
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