“The pig through the python” is how some are describing the oncoming flood of baby boomers reaching retirement age.
The first boomers will reach early retirement age next year, to be followed by their peers over the next 20 years. If today’s “early retirement” trend holds, a baby boom crisis could arrive earlier than anticipated.
Virtually everyone acknowledges that the Social Security system is incapable of providing a long-term solution to the financial needs of this huge group. Yet more and more, the only true lifetime “pension” the average American enjoys is Social Security–a result of the 25-year shift away from guaranteed lifetime pensions to defined contribution programs.
We have written in the past about the disservice built into the current tax and labor codes, where life expectancy gets confused with life. Today’s IRAs and 401(k)s mandate payouts for life expectancy despite the fact that over half of retirees will outlive the statistical life expectancy determined by the government. So, large numbers will outlive their retirement funds.
The annuity industry has tried for years to get the government to provide incentives for people to annuitize such funds. Only a life annuity provided by a legal reserve life insurance company can truly guarantee payments no matter how long one lives. Yet perpetual budget constraints and a seeming insensitivity to the need to plan for true lifetime income have kept Congress from addressing this issue effectively.
Sales of variable and fixed deferred annuities are at an all-time high. Moreover, annuity distributors increasingly seem to be realizing that annuitization is a necessary part of retirement planning. However, this realization is still very limited and there is nowhere near the wave of annuitizations required to avoid a retirement crisis in the not too distant future.
The problem is easily solvable and has been proposed for many years by bipartisan members of Congress. That is to provide an incentive for people to retire with life annuities instead of other retirement forms that provide payments only for life expectancy. An Internal Revenue Code provision permitting a tax reduction for payments guaranteed for life should go a long way to ameliorate the problem.
Several alternative methods have been suggested, ranging from affording capital gains tax rates for lifetime annuity payments to making some part of lifetime annuity payments tax-free. Many other alternatives could also be suggested to stimulate annuitization. The critical element here would be to send the message that insurance against outliving retirement income is a necessary element of retirement planning and that the government recognizes this and has provided incentives to promote the necessary outcome.
Certainly, an authoritarian government could mandate that all payouts from qualified retirement plans be in the form of a lifetime annuity. Yet, such a simplistic solution robs retirees of the flexibility to provide at least some element of liquidity for their retirement years.
Moreover, there would remain the concern about the huge numbers of non-qualified annuities that also need stimulation to annuitize. It would seem equally valid to have tax incentives to promote annuitization of qualified plan distributions and distributions from non-qualified deferred annuities.
We understand that the government resists any program that avoids full rate taxation of qualified plan distributions. The reasoning here is that people have already had enough of an incentive in qualified plan tax-deferral, and that providing additional incentives post retirement deprives government of too many tax dollars. This is short-sighted. The crisis of the “pig through the python” will require the government to resolve the issue one way or another–and the solution will affect the revenue the government has to spend.
The choice is to incentivize people to provide their own solutions or to have the government institute huge, expensive programs to solve the problem.
We believe it is easier and, in the long run cheaper, to permit people to solve their own problems rather than turn this over to a government bureaucracy. If the government takes over, inevitably politics will affect the outcome, entitlements will become key to the process, and we will have merely created a new problem rather than solved the current one.
The annuity industry, with the help of reasonable tax incentives, can solve the problems of large numbers of people at risk for outliving their retirement funds. It may well be that, in the long run, tax incentives to promote annuitization would result in more government revenue, not less. This has been the case with capital gains tax incentives, and it could well also apply to annuitization incentives. It would be interesting to see some studies to determine if this would be the case.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla. office of Blazzard & Hasenauer, P.C. Their e-mail address is: