Intensify Annuity Development
As The Social Security Debate Unfolds
Social Security reform appears to be the latest neocon idea, and its catch phrase is “personal retirement accounts.” Annuities are, or should be, in the thick of it.
“Neocon” is a term that has been around since the 1950s. It refers to people who are said to believe that ideas rule the world and that the way an idea is presented (imagery) is just as important as the idea itself. (An example: Neocons had elaborate ideas about economics in the early 1980s, but these ideas didnt take off until the neocons came up with the imaginative phrase “supply-side economics.” Once that term took hold, the ideas became part of government policy.)
In the Social Security debate, the neocon idea appears to be personal retirement accounts. The discussion centers on a probably irrefutable argument that 2 or 3 workers (as opposed to 18 long ago) cannot be expected to support 1 retiree in a compulsory transfer-of-income scheme.
However, the insurance industrys people (not the neocons) are the real experts on annuities and security plans. Therefore, in any Social Security reform effort that takes place, the industry must not hide in its castle until the business is wrecked. Its leaders must believe, and insist, that the industry have a role in the rebuilding ahead.
If it plays its role properly, it will help secure the future of the annuity business and also of the retirees of this country in immeasurable ways.
It is said that personal retirement accounts will weaken our sales of permanent plans and annuities. But will they? If so, the industry will need to do its homework and develop the facts and figures that make its case irrefutable.
Maybe those personal retirement accounts will be an inevitable development anyway. If that proves to be the case, then the industry can turn the arrival of these accounts to its ownand its customersadvantage. How? By pointing outand, again, provingthat personal retirement accounts are never going to be adequate as a source of retirement income.
These products, whatever form they may take, will always need a lot of supplementingby 401(k)s, IRAs, 501(c)3s, and other qualified retirement plans. (Significantly, the new neocons support the supplementation idea, too.)
In the process of promoting the supplemental role that annuities can play, perhaps the industry can even launch a push to fix all those aggravating rules that hinder present annuity efforts. For example, many rules today do not allow for proper treatment of executives in the area of retirement plans. Im referring here to the various nondiscrimination rules; these rules are so convoluted that they seem repressive, especially for the smaller companies.
A lot of the furor (both in the industry and in the debate) involves an insidious unknown ogre: annuitant life expectancy. Supposedly, this ogre is causing all the problems. Thats why that ratio is now 3 workers to 1 retiree instead of 18 to 1. Thats why the system will go broke, etc. etc.
But the annuity industry is the unique expert concerning annuitant life expectancy. It understands and can tame the ogre. (It turns out that there are many different ogres, as the chart on this page shows.) The variation in annuitant mortality is truly amazing.
Right now, the annuity industry is making progress on developing modern retirement planning approaches and guaranteed lifetime income streams (via income annuities). It has long known how to come up with income streams that help keep cash from being squandered. Its tax advantages are for the policyholders benefit, and the industry should not let that be weakened.
In fact, the business needs to keep lobbying for income annuity tax breaks, as well as intensifying its income annuity product development. It needs to step to the forefront of the debate, as advocates of true income security for all citizens.
In other recent government programs (such as those establishing health savings accounts), the insurance industry does play a key role. In HSAs, for instance, the industry provides the funding mechanisms. Investment of the HSA accounts will be in the private sector. That fact alone demonstrates the confidence the government has in the industrys long-standing expertise in financial matters.
The industrys far-reaching and varied products demonstrate that the business is also expert in plan design. And, it is even the unique expert on annuitant life expectancy.
All of which is to say, the insurance industry does indeed have a role in the rebuilding ahead involving personal retirement accounts and other matters of financial security. The industry needs to meet neocon with neoconthat is, it needs to develop its own imaginative way of carrying its message into the debate.
John M. Bragg, FSA, ACAS, MAAA, is actuarial consultant at John M. Bragg and Associates, Atlanta; past president of Society of Actuaries; and past CEO of Life Insurance Company of Georgia. You can e-mail him at firstname.lastname@example.org.
Reproduced from National Underwriter Edition, February 25, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.