It’s no secret that people are living longer and saving less than they need for retirement. Life insurers and many other financial services companies have been warning consumers for years and rightly so.
Last week the General Accountability Office at the behest of U.S. Sen. Herb Kohl, D-Wisc., reminded us that Americans have a problem on their hands.
Among other things, the report states that retirees have three primary options for lifetime income: those in defined benefit plans can receive their benefits as a lifetime annuity; retirees in defined contribution plans can purchase individual life annuities provided by insurance companies that offer retirement income on a lifetime basis; and enhancing the Social Security lifetime income stream by deferring retirement by a few years (up to age 70) in order to receive higher monthly benefits.
The third option is something that the American Academy of Actuaries, Washington, touched upon last year when it “recommended that increasing the retirement age be a part of any reform proposal.”
The GAO report discusses the use of annuities and note that about 6% of households owned individual annuities in 2007 and only 3% of the total annuities sold in 2008 were fixed immediate annuities, which provide lifetime income. The majority of annuities sold, according to a citation of the Insured Retirement Institute by the GAO, are deferred annuities which are not typically converted to lifetime income.
However, the report also notes that lifetime income annuities have several disadvantages including consumers who have the funds in hand to buy the annuities and a constant level of income or a fee for inflation riders that reduce the stream of income. And, it notes that annuities leave nothing to one’s heirs although the report does go on to say that there are annuities available with limited death benefits but at the cost of lower monthly payments.
The GAO report notes that delaying Social Security benefits is not an option for many who cannot work and lack sufficient assets to live in retirement without these benefits. And, the report says that workers with shorter life spans are less likely to be better off by delaying the start of benefits.
Last week, the American Council of Life Insurers, Washington, weighed in on the issue. Gov. Frank Keating, ACLI president and CEO, discussed the importance of Americans getting the retirement savings issue right as part of a discussion on the organization’s response to a request for information (RFI) by the departments of Treasury and Labor on the role that guaranteed lifetime income options can play in workplace retirement plans.
As part of its RFI, the ACLI included a study by Matthew Greenwald and Associates that it sponsored which found that 91 percent of Americans said they would like their employer to illustrate how much their savings would create per month for life. Moreover, the ACLI says, if the amount of monthly income is not enough, a strong majority said they would save more for retirement.
During a press conference to discuss the RFI and the strong need to provide employees with more options, Keating noted that in most cases Americans are grossly undersaved for their retirements and that the average American has on average $55,000 in cash assets not including 401(k) funds. Only 20% of Americans have pensions and in retirement the average Social Security check is $1,158, Keating added. He proceeded to explain why the option of using annuities to create a lifetime stream of income is necessary.
Greenwald then spoke of the study’s findings which found, among other things that 78%of 750 respondents would be interested in having an employer provide more information on what one can do with their retirement savings once they retire. The study found that 90% of those surveyed would strongly or somewhat favor an employer offering an option that would use some of retirement plan savings to produce guaranteed monthly savings for the rest of their lives.
James Szostek, ACLI’s vice president-taxes and retirement security, described the benefit of allowing partial annuitization of a retiree’s benefits, noting that “For in-plan arrangements, guidance should make clear that plans may permit participants to purchase guaranteed lifetime income with a portion of their account balance.”
The Insured Retirement Institute, Washington, is also submitting an RFI, is making four major conceptual requests of the administration:
1. Implement measures that will incentivize employers to make guaranteed lifetime income strategies available for employees inside employer-sponsored retirement plans;
2. Help to make guaranteed lifetime income solutions attractive for investors outside of employer sponsored plans, including in individual retirement accounts, by incentivizing their use and educating Americans about their benefits;
3. Simplify rules and relieve administrative burdens for employers who wish to include guaranteed lifetime income products as investment or distribution options in their retirement plans; and
4. Encourage the provision of high-quality educational materials to individuals by eliminating the current administrative barriers and regulatory uncertainty.
The Investment Company Institute, Washington, started the year with a release of a 3,000 household survey that found that over 73 percent of households surveyed indicated that they are confident that retirement plan accounts can help people research their retirement goals. But the ICI said that the survey indicated that 70 percent opposed the concept of a mandated annuity or government payout.
And, the Life Insurance Settlement Association, Orlando, Fla., says that for those who don’t need life insurance anymore, selling that contract is no longer wanted or needed is a way to raise money for life’s needs and provide for retirement.
The solution to this major, critical retirement issue may be one, some or perhaps, none of the above depending on individual circumstances. But given what is at stake, retirement security for Americans, none of these ideas should be dismissed or minimized and all need to be fairly considered.