Annuitizing Retirement Savings
Recently, the Health, Employment, Labor, and Pensions (HELP) sub-committee held a hearing to discuss whether lawmakers in Congress should consider potential tools to encourage the use of lifetime income options, or annuities, within defined contribution-type retirement planning vehicles. One suggestion would default 20% of a retiree's assets into an immediate annuity vehicle that would pay out funds during retirement to increase retirement security for Americans.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about recent calls to take steps to create a system where the default option is to annuitize retirement savings.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: We go to great lengths to encourage taxpayers to save to create a reliable stream of income during retirement. During an individual's working years, there is plenty of emphasis on the importance of saving--and we even educate Americans about the amount that they should be saving. We do absolutely nothing to help Americans understand how to manage those retirement dollars once they reach retirement. Focusing on annuitizing retirement dollars can be the key to maintaining financial stability for millions of retired Americans.
Bloink: Annuities are extremely complicated financial products. In reality, the costs associated with an annuity product far outweigh the benefits for most individuals. Yes, increased emphasis on education and financial literacy will be important to preventing situations where Americans are running out of money during retirement. Annuities are simply not the end-all-be-all solution to this problem. The fees associated with annuities can quickly strip the financial benefits associated with the products.
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Byrnes: Annuitizing defined contribution funds can provide a reliable income stream for hardworking Americans once they actually retire. We already default employees into saving for their retirement. Why should we not provide a default option for the decumulation phase? Of course, the system could allow the participant to opt out of the lifetime income option—just as they're permitted to opt out of the default savings allocation.
Bloink: While annuities within defined contribution plans can be a valuable choice, they should remain just that—a choice. They should not be the default that American taxpayers are required to affirmatively opt out of. Of course, lifetime income is beneficial and has its place. The issue is that it shouldn't be the default.
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Byrnes: The risk of running out of funds during retirement is real. By some estimates, something like 45% of American households could run out of funds during retirement even after spending years saving within defined contribution vehicles. Annuitizing retirement dollars would be key to ensuring stability for American workers during their retirement years.
Bloink: Yes, annuities have their place in retirement planning and they can be beneficial under the right set of circumstances. That said, we have a nation where taxpayers are unable to save for retirement in the first place. Our current focus should be on increasing taxpayers' ability to save for retirement through providing a living wage so that taxpayers even have the means and options for purchasing these complex financial products in the first place