“We’re sleepwalking towards a retirement death,” warned former Congressman Earl Pomeroy at an Insured Retirement Institute (IRI) conference earlier this year. I’ve known the congressman for decades—dating back to our days as insurance commissioners. So when my friend uttered those words, I knew how serious he was.
Pomeroy said it would be outrageous to put into question the tax incentives that are encouraging Americans to save for retirement, at a time when nation is not saving nearly enough. Yet with the so-called fiscal cliff on our doorstep, leaders in Washington are studying tax expenditures, hoping to identify new revenue. With retirement savings ranking among the largest tax expenditures, those same tax incentives are now in jeopardy and the repercussions for the insured retirement industry could be vast.
Among the tax incentives on the table that could be reduced or eliminated: the tax-deferred status of the inside buildup of annuities and other retirement savings vehicles. Given that these incentives are helping Americans attain financial freedom and security during their retirement years, in no uncertain terms, this would be a retirement death.
Demand for lifetime income
According to a new report from IRI and Cogent Research, “The Evolution of the Annuity Industry 2012,” annuities are increasingly considered by consumers to be a vital part of a retirement strategy. Additionally, 71 percent of advisors reported having a client request to purchase an annuity during the past year. There’s no question that consumers are seeking certainty during uncertain times and this has renewed interest and spurred the demand for insured retirement products. But this is only part of the story.
One cannot discount the importance of tax deferral in leading consumers to select an annuity as a source of lifetime income. The same IRI and Cogent report found that tax deferral is among consumers’ top reasons for including annuities within a holistic retirement plan, and more than half of the advisors surveyed identified tax-deferred growth as a very or extremely important factor when evaluating and selecting a variable annuity—with nearly 30 percent of advisors believing that tax deferral will take on added importance during the next five years.
Importance of tax deferral for middle-income Americans
The tax-deferred growth of annuities provides Americans with an important incentive to save for retirement and attain financial security. This incentive has been most utilized and valued by one population segment more than any other: middle-income Americans. IRI’s research shows that annuity owners are overwhelmingly middle income, with eight in 10 buyers of non-qualified annuity contracts having annual household income of less than $100,000. This includes 64 percent who earn less than $75,000.