The View From Here . . .

Even in this hyperpartisan age, there should be policy areas where parties can reach agreement. One such sphere is the initiatives of the Obama Administration to encourage participants in 401(k) and similar plans to receive some or all of their balances in the form of an annuity

The interest in annuities makes considerable sense. Thirty years ago most large employers sponsored defined benefit retirement plans which provided monthly income for the lifetime of the employee (and if married, reduced income after the employee’s death for a surviving spouse). This was a welcome additional safety net for the employee in addition to Social Security. Both the investment risk and the risk that the employee would outlive his or her expected mortality date were on the employer rather than the employee.

Then came the rise, at least in the private sector, of defined contribution individual account arrangements, most notably 401(k) plans. Defined contribution plans generally give the employee considerable freedom over the investment of plan balances but place the risk of investment losses and the chance of outliving benefits on the employee rather than the employer.

As the huge baby boom generation nears retirement age, the financial security of older people assumes increased national importance. According to a Brookings Institute study, a woman age 65 currently has a 50 percent chance of attaining age 85 and a one-third chance of reaching 90. (Men do not live as long but male longevity is increasing.)

This is where annuities can help. An annuity permits the employee to convert a lump sum retirement benefit into a predictable monthly stream of income. These payments can be adjusted if desired (by an adjustment in the monthly payout) to provide income for a surviving spouse or to provide for a minimum payout in the event the employee dies almost immediately after signing up for the annuity.

Of course, as a recent article by Ron Lieber in The New York Times points out, there is considerable consumer resistance to annuities. The most basic problem is the “difficulty of seeing a big number suddenly grow small”. For example, a $100,000 account balance will buy an monthly annuity of about $632 a month.

What is not needed is any requirement that annuitization be mandatory. Apart from important issues of personal freedom, there can be many reasons why a smart investor might not want to annuitize, including poor health and sufficient other assets to provide adequate retirement funding.

Still, annuities surely make sense for a great number of people. As Mr. Leiber’s article points out, there are a number of possible measures that might encourage employees to make wise decisions. Retirement plan administrators might be required to give account holders an annual estimate of the annuity value of their holdings so that they would be familiar with the value expressed as a monthly benefit. An official of the Obama Administration has suggested a “test drive” whereby perhaps half of a new retiree’s lump sums is deposited into an annuity product, unless the employee opts out. The annuity lasts for two years, after which the employee can either withdraw the balance without penalty or decide that he or she likes the regular monthly checks.

This would seem to be an area where there are not large ideological divides between Democrats and Republicans. There is widespread agreement that the existing private pension system will have an important role to play in supplementing Social Security. Taking a careful look at that system and making it work better for individual retirees should be common ground.