Government Annuities?

For many people, 401(k) or 403(b) savings form a key component of their retirement plans. When these plans were first instituted in the early 1980s, few people anticipated how important these programs would become in many people’s portfolios. Perhaps most importantly, such savings free individuals from dependence on their companies for retirement benefits. These accounts, in most cases, allow individuals to choose investments that would provide growth and income irrespective of the long-term prospects of their companies. The holdings in reasonably diversified 401(k) plans would not be significantly affected by the fortunes of any few companies.

During retirement, individuals have many choices with respect to what to do with their retirement account accumulations. They could maintain their own investments and withdrawal a portion every year to live upon. The advantages of such an approach are that individuals have control over their investments and that when they pass on they can leave some money to their heirs. The disadvantage is that people can make unwise investment decisions or they can simply outlive their resources. To mitigate this possibility, some people purchase annuities. For a fixed investment, an insurance company agrees to pay a person pension for a fixed period of for life (and sometimes the life of the spouse). The insurance company assumes the risk of longevity. If an individual retiree dies earlier than expected, the insurance company makes money. A long-lived retiree may cost the insurance company money. In essence, the risk of longevity is shared.

Apparently, the Federal government is looking at encouraging people to move more to the annuity option. The government may be reasonably concerned about encouraging rational evaluations of risk and the informing the choices about retirement options. The government could deal with this by making investment tools and advice available to aid in retirement decisions.

However, some people are concerned that the government is looking enviously on all the assets accumulated in retirement accounts. It is possible for the government to offer annuities at actuarially unsound rates to obtain current funds in exchange for government-backed promises of future income. The House Education and Labor Committee is focusing on ways of directing 401(k) funds into Treasury bonds. Indeed, the goal seems to be melding 401(k) resources into a Social Security like system – first as a voluntary choice, and perhaps later as a requirement. In the open market, Treasury bonds are priced at their market value. A government promise for future incomes in a government social program, need not be priced appropriately. The underfunding of Social Security demonstrates this.

Whether bailing out banks, car companies, or individuals,  the government exercises much of its power by transferring funds from people who make responsible decisions to those who make unwise ones. Those frugal enough to have forgone current income to save in 401(k) plans now are conspicuous targets. I suspect that people have such a proprietary view of the money they have saved, that any attempt by government to unfairly seize these funds (regardless of any promised benefits) will doom any politician that suggested it. People feel strongly about what they consider the Social Security they “earned.” How much more protective of will they be of funds they more directly earned?

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