Annuities are getting noticed, for better or worse. In January, the president endorsed annuities, in principle, as a way to help retirees maintain their living standards. Days later, the Treasury and Labor Departments requested public input on the topic of converting retirement plan balances to lifetime income.
Wow. Cinderella's been invited to the dance. The Insured Retirement Institute, which lobbies for annuity manufacturers, celebrated the moment with a joyful press release. Ron Lieber of the New York Times devoted his entire Jan. 30 column to the pros and cons of income annuities.
But fame can be fleeting--and fatal. Where the government goeth, unintended consequences follow. After witnessing the health care debacle, I can imagine a similar train wreck over annuities.
Why be apprehensive? Treasury and Labor asked 39 questions in their Request for Information on lifetime income. They will get TMI--too much information. Their e-mail boxes will groan with gigabytes of data from academics, ERISA wonks, executives, lobbyists, the folks from AARP and bloggers who smell a Democratic plot to nationalize private savings.
Each group will tout its pet solution to the retirement income dilemma. Idealists will advocate safe, simple immediate annuities for the masses, where the money goes into bonds. The mutual fund industry will lobby hard for variable deferred annuities with lifetime income riders, where most of the money stays in equities.
Many of these solutions conflict, diverge, or are mutually exclusive. Add them up and you won't get consensus. You'll get zero. In any case, annuities are not the issue. There are plenty of income products on the market already--immediate annuities, longevity insurance, living benefits, payout mutual funds, 20-year TIPS funds. They're all shovel-ready.
The 401(k) system itself is a bigger problem. It's a rickety base on which to build a secure retirement. As a pipeline to annuities, it's leaky. People change jobs every six years, on average, and they usually spend some of their savings when they do. There are technical issues as well. ERISA plans can't discriminate on sex; income annuities use gender-specific mortality tables.
Offering annuities to the average plan participant is a little like putting stock certificates in parachute sacks, if you recall the 1970 movie "Catch-22." Americans don't need more financial instruments. They need more money. They also need protection from timing risk. Most people who are about to retire are like trapeze artists who have no choice but to leap, even if the bar--i.e., the financial markets--doesn't happen to be swinging their way. Some people get lucky and swing to a secure retirement. Many fall.
So far, Social Security is their only net. Nothing else prevents Joe the Plumber from having to market-time his retirement. That's why the government should fix it before fiddling with private annuities. Patch it up. Restore confidence in it. Uncle Sam might also teach people to use their required minimum distribution as an annuity. It's crude but it's already in place. Finally, kids should learn about annuities in school. By the time they retire, it's too late.
Kerry Pechter is the author of "Annuities for Dummies" and editor of retirementincomejournal.com.
