I watch in dismay as one insurance company after another continues the slow and torturous process of freezing, limiting and withdrawing the benefits from their guaranteed living withdrawal benefits (GLWBs). A week doesn’t go by without another shoe dropping. A payout percentage here, an equity fund there, a joint-life option over here and before you know it, your variable annuity (VA) has been neutered.
Even competitors enjoying their moment of schadenfreude must now contend with the inevitable cynicism and distracting questions that follow the fog and confusion. “So, when will you guys cut benefits?” Or, even worse: “Were you the guys that changed features?” These are legitimate questions that even the strongest companies must address as the trend towards lower payouts continues.
So what’s next? Will guaranteed rates go as low as the fed funds rate itself? Are we heading towards a GLWB that pays 0% income for life—or even joint life? I’m sure savvy annuity wholesalers can spin a tale to make any dog hunt, but at some point even they will realize the gig is up.
And so, perhaps the next step in the evolution of retirement annuities is to go back to the past. Maybe the annuity of the year 2020 pays out no cash at all, but instead offers an actual retirement service. Allow me to explain.
One of the lesser-known facts about retirement annuities—i.e., annuities that provide an income for the rest of your natural life, when you can no longer work or care for yourself—is that despite their illustrious 2,500 year history, it is only in the last few hundred years that their benefits have been paid in cash.
For the first few thousand years, retirement annuities provided something more reliable and useful than nominal cash or coin. Annuities paid out in units of service.
Case in point. The first known retirement annuity is documented in the Hebrew Bible, in Kings II, Chapter 25, Verse 27-30. Here is a direct translation. “And it came to pass…. that the king of Babylon did lift up the head of the king of Judah out of prison…. And he spoke kindly to him, and he did eat bread continually before him all the days of his life. And his allowance was a daily rate for every day, all the days of his life.”
According to most insurance historians, this places the first retirement annuity in the year 550 B.C. And, it was paid out in units of dinner.
During the Middle Ages, wealthy landowners and merchants purchased so-called corrodies from monasteries and abbeys, which provided them with food, clothing and often shelter for the rest of their lives. Wealth they had. It was services they wanted.
On a slightly more amusing note, the famous English poet and author Geoffrey Chaucer (c. 1343-1400) so enthralled King Edward III, that he was granted a rather unique annuity at the young age of 35. The retirement annuity was one gallon of wine daily for the rest of his life, to be served in the port of London. (That is 16 glasses of wine per day, and a newfound respect for The Canterbury Tales!)