Bolstering U.S. Retirement Security Through Annuities
A looming problem facing over 70 million aging Baby Boomers—how to manage their savings during retirement and not outlive their assets—could be addressed by offering tax incentives to annuitize savings held in 401ks, IRAs and other sources of retirement income.
Increased use of annuities by retirees can also boost U.S. GDP levels, employment and the S&P 500. (Annuities are financial products that provide insurance against outliving one’s financial assets by allowing a lump sum of wealth to be converted into a stream of future payments that typically continues as long as someone is living.)
These conclusions are found in two groundbreaking studies released today by The American Council for Capital Formation (ACCF) that examine the possible consequences of tax exemptions on household annuitization levels as well as the macroeconomic effects of increased annuity purchases.
“Similar to the boost that tax incentive policies have given 401K and IRA plans, offering exemptions on annuity purchases could significantly boost annuitization with a relatively modest revenue cost to the government,” said William Gentry, Associate Professor of Economics at Williams College.
In the microeconomic analysis, Gentry and Casey Rothschild, Assistant Professor of Economics at Middlebury College analyzed the impact of HR 2951 by Rep. Earl Pomeroy (D-ND), which exempts up to $5,000 per individual ($10,000 per couple). The authors looked at the annuitization behavior of households with differing levels of retirement preparedness as well as revenue consequences and found that, if enacted, the proposal would:
- Reduce the total cost of providing an annuity by as much as 8%.
- Increase the amount the average retiree household annuitizes by about $50,000
- Reduce federal tax receipts by very modest amounts, around 10-15 cents per dollar of
In the macroeconomic analysis, Allen Sinai, Chief Global Economist, Global Strategist and President of Decision Economics, conducted simulations to identify economic sectors potentially affected by increased annuity purchases if the Pomeroy legislation had been enacted between1995 – 2005 and found:
- Increase in Gross Domestic Product by $34 billion per year
- Lower unemployment by 0.1% per year, up to 200,000 more jobs annually
- Increase in consumption by $36 billion per year “There are positive economic benefits associated with a tax incentive on annuities,” said Sinai.
“We see increased consumption and better lifestyle in retirement years from a government investment that returns a big bang for the buck.”
The new ACCF research products come at a pivotal time as the traditional pension system is in decline and defined contribution plans are on the rise—placing retirement security directly in the hands of the employee. As millions of Baby Boomers approach retirement and life expectancy is on the rise, retirees face an increasing risk of outliving their assets.
“These encouraging results suggest that a change in tax law could address the very serious public policy challenge of retirees outliving their assets,” said ACCF President Mark Bloomfield. “Responsible management of payouts is crucial to retirement security and Congress should tackle the much needed policy reforms before it is too late.”