Would You Buy a United States Government Annuity?

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.

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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?

8 Responses to Would You Buy a United States Government Annuity?

  1. JT McGee says:

    I buy it every year in Social Security…and it sucks!

    I share your concern that stems from economists saying “this won’t cost the government a penny.” After all, SS was supposed to be revenue-generating from beginning to end, and we know how that worked out.

  2. Andy Hough says:

    Insurance companies take the annuity money and invest it to make a profit while the government would most likely spend it immediately. It still might be a cheaper way for the government to borrow money though. I’d be for a government annuity if they used it to phase out Social Security.

    • Evan says:

      Like JT said, they kind are using a similar system but instead of an immediate annuity it is a Deferred annuity with a terrible ROI (for us).

      You are 1000% correct, if I sent in $100K for my Gov’t Annuity it would be spent before the check even cleared lol

  3. It would depend on the fee structure and details. Although I am a fan of Odean, it would have to have a better return than similar products. In general annuities have outrageous fees and large sales commissions. I assume the govt sales commissions wouldn’t be too high, but like Andy said, the govt. would probably spend the money instead of investing it.

    • Evan says:

      “Better return than similar products?”
      - Zero chance. Zero. You would be paying (i.e. not receiving) for safety.

      Annuities are an easy target for a lot of financial/investment advisors, but I really believe they have a place, even if it is a sliver, in most near-retirees portfolio.

  4. The problem is that government has a horrible track record with finances. It’s analogous to letting a drug junkie keep inventory on the drugs that the police department collect in drug raids.

    So yes, based on reality and the way that the government has a lack of financial sense, I would skip on this “pie in the sky” idea.

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