Should Social Security Account Holders Annuitize?

Requiring holders of private Social Security accounts to buy lifetime annuities could help retirees with long lives but hurt holders with shorter lives.[@@]

Researchers on the staff of the National Academy of Social Insurance, Washington, make that case in a paper presented here today at the National Press Club.

The researchers looked at the topic because of a proposal by President Bush to let workers put some of their Social Security contributions into private accounts. The accounts would be similar to federal employees’ Thrift Savings Plan accounts. Thrift plan holders can buy annuities with their contributions or convert plan account assets into fixed annuities at retirement.

The researchers, Virginia Reno and Joni Lavery, are recommending that policymakers should require purchase of a lifetime annuity only if the main purpose of the account is to provide basic income security.

In that case, “policymakers might want to require that retirees buy life annuities that have inflation protection and that automatically provide for widowed spouses,” the researchers write in their paper.

But policymakers may not want to provide an annuity purchase requirement for holders of private Social Security accounts “if the accounts are voluntary new savings on top of the traditional Social Security system,” the researchers write. In that case, the researchers suggest, “policymakers might favor granting people broad freedom to decide how to tap the accounts.”