Here’s an out-there idea whose time has probably not come, at least not yet: What if, instead of (or in addition to) floating bonds, the federal government sold retirement annuities?
That may sound like a wild idea, especially in an era when policymakers are talking about privatizing Medicare. But it has advocates within the retirement industry. The upside, according to Martha Tejera, a veteran retirement plan consultant, is that retirees who bought annuities guaranteed by Uncle Sam would feel like their retirement funds were secure. They wouldn’t have to worry about managing their own nest egg, running out of money, or handing their funds over to a Madoff-style crook.
“I think we are creating a whole generation of retirees who are just going to be preyed upon, by both legitimate and non-legitimate sellers of financial products and advice,” she says.
I spoke to Tejera while I was researching today’s Stern Advice column about the changing debate surrounding 401(k) accounts. Instead of focusing on the ability of workers to build enough savings in those accounts, retirement industry experts like Tejera are starting to focus on what happens to that money when workers retire. Asking individuals who aren’t financial professionals to manage their nest egg for a lifetime might be asking a lot. “If you hand them $200,000 all at once, it can go poof! pretty quickly,” she says.
The government-as-annuity-seller idea was raised recently by a couple of well-known professors in a New York Times opinion piece. University of Texas Law School professor Henry T. C. Hu and University of California Berkeley finance professor Terrance Odean argued that having the federal government guarantee inflation-adjusted annuities would help people cope with the possibility of outliving their savings, and would also earn the Treasury some tidy deficit-reducing profits.
In their view, having the federal government guarantee annuities will reassure workers that the insurance companies selling them lifelong income streams will still be around when the money is needed. It will allow the insurance industry to create and manage the annuities, so it won”t wipe out that sector altogether”. It would reduce federal reliance on Chinese (and other foreign) bond buyers. “Our proposal is a winner for everyone,” they said.
Of course, a few questions remain. One that springs to mind is: Isn’t that what Social Security already is? Not exactly, as Social Security is not a self-funded and dedicated annuity, but a more broad-based pay-as-you-go retirement security program. The annuity plan could be invested by the insurance industry in instruments yielding more than the Treasury bonds that the Social Security program relies on.
Here’s another question: Do that many retirees really need annuities? That’s a whole other question for a whole other blog post. Watch this space.
Should the federal government sell retirement annuities?
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