As the baby boomers get older and older it is almost impossible to pick up a financial publication that doesn’t discuss turning one’s nest egg into a stream of income. It has been a while since I explained both an immediate annuity and deferred annuities, but basically they are financial products that turn a sum certain into a stream of payments. I personally think they have a place in almost every retirees situation to some extent, but have such a bad connotation that they aren’t used enough. I can’t believe it took this long, but two finance professors have asked the question whether you would purchase a government annuity?
In their short op-ed piece for the NY Times Professor Hu and Professor Odean wrote,
We believe that a new product — a federally issued, inflation-adjusted annuity — would make it possible for people to deal with this problem, with the bonus of contributing to the public coffers. By doing good for individuals, the federal government could actually do well for itself.
The insurance industry sells an inflation-adjusted annuity that goes part of the way toward helping people cope with the possibility of outliving their savings. During your working years or at the time of retirement, you can pay a premium to an insurance company in exchange for the promise that the company will pay you a fixed annual income, adjusted for inflation, until you die.
Here’s how it would work. Initially, people who wanted to buy this insurance would enroll through one of the qualified retirement savings plans already offered to the public, like a 401(k) plan, and could choose this annuity option instead of, or in addition to, investments in stocks, bonds or mutual funds.
How much the payouts would be could be based on a variety of factors, including interest rates on government bonds; mortality tables that, among other things, take into account that healthier people are more likely to buy annuities; and administrative costs. This new product wouldn’t cost the government a penny. In fact, the Treasury would benefit. It is only an incremental move beyond issuing inflation-adjusted bonds, which the Treasury already does. By allowing the government to tap a new class of investors, the cost of government borrowing over all would probably drop.
These professors have more knowledge about finances in their pinky toe then I can possibly hope to learn my entire life life, but I can’t believe they would make a statement like “this new product wouldn’t cost the government a penny.” That would assume that that no insurance company who sold annuities ever lost money on a particular annuity or annuity like product? That is ludicrous.
Notwithstanding, politically I hate the idea. It is providing more money to a government that can’t seem to get spending under control. Yes, the federal government would get an influx of cash in the billions, but it would be taking on billions multiplied by growth/guarantees of liability. Insurance companies, while bloated themselves, are set up for this…why put the government in the middle?
On the other hand, would I buy one myself? Maybe. This type of safety usually costs money, think about comparing US Treasury Bonds (~0%) vs. Greece Treasury Bonds (nearing 20%). So it is obvious that it won’t pay as well as a standard annuity, but that spread is what would make the decision.
Would you buy a U.S. Government Annuity?