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headshot of Michael Finke, a professor for the American College of Financial Services

Life Health > Annuities > Fixed Annuities

'Annuities' Hits Brick Wall; 'Guaranteed' Works: Michael Finke

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What You Need to Know

  • The Alliance for Lifetime Income brought a long list of industry executives and retirement researchers to Washington for the Summit.
  • One takeaway is the generations matter.
  • Another takeaway is that some words have more power than others.

Life insurers, researchers and others converged on Washington last week to sell themselves, and the world, on the idea that it’s nice for retirees to have big companies working hard to offer them a stream of income that will last throughout retirement.

The Alliance for Lifetime Income held the 2022 Future of Protected Income Summit: The Countdown to Peak 65, in person. Executives like Eric Steigerwalt of Brighthouse Financial, Nick Lane of Equitable, David Blanchett of PGIM and Bryan Pinsky of AIG Life & Retirement emphasizing that their companies have hundreds of billions of dollars of assets and a wide range of technical expertise mobilized to provide the financial certainty that many retirees crave.

Michael Finke — the Frank M. Engel Chair of Economic Security at The American College of Financial Services — acknowledged during one session that life insurers are uncomfortable, in such a complicated and uncertain world, to use the word “guarantee” to describe what they provide for the income of holders of individual income annuities and annuity-backed defined benefit pension plans.

But using the word “guarantee” is “incredibly emotionally powerful,” Finke said. “It’s a shame that we don’t feel comfortable doing that.”

Baby Boomers Are Aging

Jason Fichtner, chief economist at the Bipartisan Policy Center and a senior fellow with the Retirement Income Institute, talked about the concept of “Peak 65,” or the idea that the aging of the baby boomers will start to push the number of Americans turning 65 to enormous levels starting in 2024.

“We are seeing a shift in the population from a larger percentage being younger to a larger percentage being older,” Fichtner said.

The aging of the population is creating challenges for public retirement programs, and individuals trying to prepare for their own retirement, and it will absorb the level of resources available for education and other programs aimed at younger people, Fichtner said.

“So, it affects all generations,” he added.

The “Annuity” Brick Wall

Economists and financial advisors have shown that, in recent decades, for typical people, investment markets have done well, and diversified portfolios consisting of stocks, bonds, cash and other assets have tended to perform better than annuities.

Life insurers and annuity sellers have struggled to explain that providing account value guarantees is difficult and expensive, and that persuading retirement savers to insure their own retirement income with annuities is difficult and requires energetic, well-trained, well-compensated teams of advisors.

Finke said, when describing the results of a survey of defined contribution plan participants, that one problem is that the critics have made asking consumers directly about their thoughts about “annuities” as a source of guaranteed income is difficult.

“If you call it ‘annuities,’ then you’re going to run into the brick wall,” Finke said.

Finke said joked that, to get around the negativity surrounding the word “annuity” as a term referring to “guaranteed income,” his survey teams “are going to characterize it as a ‘pension-like thing-a-majig.;”


Once a survey team gets past prejudice against the word “annuity,” the obvious conclusion is that typical defined contribution plan participants want a world with a combination of 401(k) plan-like funds that they control themselves and a source of guaranteed income, not just one or the other, Finke said.

Finke emphasized that consumers’ own interest in annuitization depends partly on the value they place on certainty, not solely on the kind of financial analysis an economist who was relatively new to the topic might perform.

“As you get older, your receptivity to annuitization goes up,” Finke said.

Women tend to like annuitization more than men do, and smokers — who are at high risk of dying young — have a strong interest in getting deferred annuities, with streams of benefits that start age 85 or later, Finke reported.

Finke said that, in some cases, consumers’ “emotion-based” preferences for annuitization might reflect financial factors outside of the scope of a typical economic analysis.

Smokers, for example, might like the idea of deferred annuities because they believe themselves to be poor at delaying gratification, and because they believe, correctly, that they are at a relatively high risk of using their savings early, Finke said.

The Word

Finke said one clear survey finding is that, “‘Guaranteed’ means a lot to people. Everyone likes that idea.”

Life insurers prefer to use the term “protected income,” but Finke made the case for finding a way to bring back the word “guaranteed.”

“Framing is so important,” Finke said.

Pictured: Michael Finke (Photo: Alliance for Lifetime Income)


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