Government in the Annuity Business?

I ran across an article in the New York Times op-ed section two weeks ago, “Paying for Old Age,” by Henry T.C. Hu and Terrance Odean.  Hu and Odean have come up with a novel idea that would allow people to retire with a steady stream of income without fear of outliving their money.  If it sounds like an annuity, it is.But there is a catch…it is a government-guaranteed annuity.  This product would act like an inflation-adjusted bond, but any risk associated with it would be insured by the federal government.  These annuities would compete with those issued by private insurers, but there would be not risk of default by the insurer,  as has occasionally happened in the private sector.

I mulled this idea over for a few weeks, hence the delay in writing about it.   Then it occurred to me that a government-guaranteed annuity is not that new and novel after all.  Think of Social Security. It is often claimed that Social Security is an “insurance” program, but funny, it does not act like one.

Compare the current system to a government-backed annuity.  Social Security is mandatory.  All pay into it.   The payroll tax revenues are spent on special obligation bonds, but these bonds are not traded on the public market.  In essence, Social Security “premiums” are not invested, but spent on other government programs, thus creating a pay-as-you-go system.  Benefit payouts are calculated based

on an individual's highest earning years without regard to individual life expectancy.   Benefit payouts are adjusted annually based on inflation.  But benefits going to today's retirees are being paid by today's workers.  Private insurers would be certain to fail if they behaved this way.

A government-guaranteed annuity, on the other hand, would be voluntary.  As the article states, payouts would

be adjusted based on interest rates on government bonds, mortality tables and other things.  While some may argue that everybody will want to purchase government-guaranteed annuities and stay away from the private market, I tend to disagree.  For one thing, many investors are not big fans of annuities.  If the demand for the government annuities is high enough, this will drive the interest rate down on them, making them perhaps less attractive than private market annuities.  Furthermore, there will always be retirees who will opt for withdrawing money from their retirement accounts on their own (without the guarantee of an annuity) if they think they can get a higher rate of return with their own investments.

Being that Social Security will pay a negative rate of return to future generations, why not allow payroll taxes to be converted into personal retirement accounts?  Then at retirement, individuals could decide how to take their distributions.  Of course this would depend largely on the government’s ability to behave like sound insurance, which they have poorly demonstrated so far.


Comments (1)

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  1. Tamara says:

    Excellent idea and clear enough for any one to understand. So glad I found your article. I have often thought we missed the boat when Bush gave us the opportunity to cash out, (I am positive many are kicking them selves) but most felt uncertain about where they would invest those funds to ensure they would be there….

    I also often think it would be a splendid idea to for groups like the NCPA, experts to interview a person like me. I will surely use you article as a reference to an article I will be writing today.

    No familial attachments, and the group could hear me out with total objectivity. I see opportunity and a good life if we could find co-operation on this level within government. Not only for this but for Medicare and Medicaid as well.

    The real fact of the matter is that I am 50 and am faced with a few simple health problems that I really want fixed (lol)….but I am in a precarious position of transition from a 30 year career in acute healthcare to that of business owner. So no insurance but I still have hope of funding these repairs myself.

    Where Obama sees nationalized health program (acute illness) I see a national voucher program that is strictly income based!!!..if you make enough to cover yourself, no soup for you, but if your income lacks amounts to cover your health then you would be provided a voucher, to meet the need-gap only. Re-qualification would be yearly. In addition it could be spent on dental or anything that improves the quality of life. The beware would be ….caution…if you spend it here ….then have a stroke ….there could be problems….wise and know thy self responsibility and weighing personal risk ***OR***…we will give the voucher..and cover anything needed but once your income improves you repay the system in small monthly affordable payments which could be the very best of all worlds. However any care must be rendered by qualified providers.

    Spend the voucher any way you need ..such as dental (Dental insurance is a total ripoff for someone like me because I NEED some dental care, 1K per year on my mouth is absurd, and not getting dental care can be life threatening )..and you would be most encouraged to find the best deal, with the best outcome based scenario you could find, nationwide. (not doing so could cause penalties in repayment) Emergent would be no questions. Therefore the gaps of coverage would be gone, and something that would encourage you to get rich so you would not need it any longer. (Repay what you use combined with your gov insured annuity could be a winner for healthcare as well..such as a pay it forward, if you require a voucher and never use it, you own 0, and repayment funds the annuity that guarantees the voucher)…humm anyway

    I look at quality of life over quantity. I would far rather live a shorter healthier life, than a long life attached to a ventilator, but that is me.

    Maybe also too, we could get the SBA out of the way of entrepreneurs …because they never meet the credit requirements set by this group. Such as a person is struggling to get their business off the ground, and has required gap coverage voucher….an EXPERT could be assigned to help them determine what would need to be done to see the business flourish or dumped within their business are of expertise. Therefore a reality check continue with a better business plan or go get a job.

    Sorry I have dumped all this into one comment but, time is always of the essence and the internet is soooo big. LOL. Thank you for such inspiring work.

    I just know it!