Jane White has written a piece at Huffington Post that is about as ignorant, deceptive and misguided as one could imagine. Essentially, White claims that all annuities are “the biggest financial rip-off on the planet” and that the government’s effort to make income annuities available via defined contribution plans is foolhardy.
There is so much stupid in White’s article that it’s hard to know where to begin. But here goes anyway (White’s words quoted and in italics).
“Why are annuities toxic? As an annuity owner you’re not only paying a fortune for an investment product that can’t fill an empty nest egg but you’ll likely be charged huge penalties if you move your money out of one and if you die there’s a good chance the insurance company is the beneficiary, not your spouse. The losers are the surviving spouses who will no longer be able to access the annuity to pay expenses, despite the fact that that’s the point of buying one in the first place.”
White badly misunderstands what the government would like to accomplish here and confuses deferred annuities with immediate (income) annuities. As Treasury’s Mark Iwry said (as one example among many), “There’s been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income.” That view is consistent with a paper he co-authored for The Brookings Institution (“This paper proposes a policy that would increase the role of lifetime income products in future retirees’ overall retirement planning”). See also Live Q&A Session with Labor Secretary Solis (December 7, 2009).
Accordingly, the goal is in no way to pitch deferred annuities during the time when people are saving for retirement. Instead, consistent with mainstream (and virtually unanimous) scholarly opinion, the goal is sustainable income streams throughout retirement – income annuities. Income annuities are simple and non-controversial products that provide a guaranteed stream of income that a retiree cannot outlive. The societal need for sustainable income is exacerbated by the ongoing disappearance of defined benefit plans that produce pension income in retirement. Moreover, income annuities don’t sell well even though they should (economists call this disconnect between what ought to happen and what happens the “annuity puzzle”), in large part because they don’t pay the advisor very much to sell them.
“How did this come to pass? Amazingly, all of the comments Treasury received on its proposal were favorable because they must have come from the insurance industry or the agents that generate commissions from selling their products.”
Had she bothered to do even a bit of research, White would have discovered that positive comments are to be expected because unbiased, scholarly opinion is essentially unanimous in supporting the benefits of income annuities. Representative examples — from prominent academics who are hardly insurance agents seeking commissions — follow.
- “Lifetime income [products] may not be the perfect financial instrument for retirement, but… they dominate anything else for most situations.” Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 2008).
- “To achieve a similar riskless guarantee of income throughout one’s uncertain lifetime without life annuities would cost between 25% and 40% more.” Babbel & Merrill, “Rational Decumulation,” Wharton Financial Institutions Center (May 2007).
- “[T]he market for privately purchased individual [income] annuities in the United States is very small,” which represents a “remarkable disconnect between theory and practice” because income “annuities ought to play an important role in the portfolios of elderly households.” Brown, “Life Annuities and Uncertain Lifetimes” National Bureau of Economic Research, NBER Reporter (Spring 2004).
- “Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and returns are carefully balanced, they dominate anything else for most situations. When supplemented with fixed income investments and equities, it is the best way we have now to provide for retirement. There is no other way to do this without spending much more money, or incurring a whole lot more risk coupled with some very good luck.” Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 12, 2008).
- “For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.” Ameriks, Veres & Warshawsky, “Making Retirement Income Last a Lifetime,” Journal of Financial Planning (December 2001).
- “If…the Social Security program will not generate sufficient income to satisfy minimal consumption needs, then it should be supplemented with the purchase of high-grade private annuities.” Babbel & Merrill, “Rational Decumulation,” Wharton Financial Institutions Center (May 2007).
- “Without additional guaranteed lifetime income streams…, middle-income Americans are at high risk of outliving their financial assets and living their final years in poverty.” Ernst & Young, “Retirement Vulnerability of New Retirees,” Americans for Secure Retirement (June 2009).
- “I have reviewed over 70 academic studies that have appeared since 1999, analyzing lifetime income annuities vs. other alternatives, and coauthored another major study. …The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.” Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 12, 2008).
When I emailed White for comment she declined except to rail against “academic nitwits”and “”consumer ripoffs.” She also noted regulatory actions in several states but these were all against deferred (not income) annuities. No surprise there.
White is correct that most people have not saved enough for retirement. It is also true that an income annuity cannot correct that problem. However, while it is not the only tool worth considering and using, an income annuity is the best tool we have to provide sustainable retirement income that cannot be outlived. For White to make the blatantly false claims she does is unconscionable.