Should the U.S. Treasury sell annuities?

May 25, 2011

Here’s an out-there idea whose time has probably not come, at least not yet: What if, instead of (or in addition to) floating bonds, the federal government sold retirement annuities?

That may sound like a wild idea, especially in an era when policymakers are talking about privatizing Medicare. But it has advocates within the retirement industry. The upside, according to Martha Tejera, a veteran retirement plan consultant, is that retirees who bought annuities guaranteed by Uncle Sam would feel like their retirement funds were secure. They wouldn’t have to worry about managing their own nest egg, running out of money, or handing their funds over to a Madoff-style crook.

“I think we are creating a whole generation of retirees who are just going to be preyed upon, by both legitimate and non-legitimate sellers of financial products and advice,” she says.

I spoke to Tejera while I was researching today’s Stern Advice column about the changing debate surrounding 401(k) accounts. Instead of focusing on the ability of workers to build enough savings in those accounts, retirement industry experts like Tejera are starting to focus on what happens to that money when workers retire. Asking individuals who aren’t financial professionals to manage their nest egg for a lifetime might be asking a lot. “If you hand them $200,000 all at once, it can go poof! pretty quickly,” she says.

The government-as-annuity-seller idea was raised recently by a couple of well-known professors in a New York Times opinion piece. University of Texas Law School professor Henry T. C. Hu and University of California Berkeley finance professor Terrance Odean argued that having the federal government guarantee inflation-adjusted annuities would help people cope with the possibility of outliving their savings, and would also earn the Treasury some tidy deficit-reducing profits.

In their view, having the federal government guarantee annuities will reassure workers that the insurance companies selling them lifelong income streams will still be around when the money is needed. It will allow the insurance industry to create and manage the annuities, so it won”t wipe out that sector altogether”. It would reduce federal reliance on Chinese (and other foreign) bond buyers. “Our proposal is a winner for everyone,” they said.

Of course, a few questions remain. One that springs to mind is: Isn’t that what Social Security already is? Not exactly, as Social Security is not a self-funded and dedicated annuity, but a more broad-based pay-as-you-go retirement security program. The annuity plan could be invested by the insurance industry in instruments yielding more than the Treasury bonds that the Social Security program relies on.

Here’s another question: Do that many retirees really need annuities? That’s a whole other question for a whole other blog post. Watch this space.

[poll id=”20″]

4 comments

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Wow… I thought the results of the survey would be the opposite. 70% of people think a federally issued annuity is a good idea, really?

Yeah sure, let’s put them in charge of even more of our financial well being. Congress has certainly done an excellent job managing the country’s finances. We might as well surrender our hard earned retirement savings too.

Sorry guys, you’ll have to count me out on this. I prefer to run my own life… and I’ll take the responsibility and risk that goes with it.

Posted by annuitywizard | Report as abusive

Most people don’t have a clue what an annuity is. Those that have a clue have huge misconceptions about what annuities do because of the confusing mess that is foisted on them by the insurance companies who sell annuities.

People don’t buy annuities because they think they can mange their own retirement income just fine thank you and are oblivious to longevity risk (the risk they will outlive their assets). Furthermore, when informed that one of the trade-offs is a lack of full liquidity, most refuse to go along even though the benefit of that illiquidity is a lifetime income that is substantially higher than anything they could accomplish using other financial vehicles.

Finally, an annuity is useless to the majority of Americans who have insufficient money set aside for any retirement. Maybe your survey question was supposed to be, “should the government give away annuities to those who have not taken the personal responsibility to adequately save for retirement?” And the answer is a resounding, “NO!”

In any event, it appears that the question is totally MOOT because the government already operates the biggest annuity program in the world, which is effectively backed up by the US Treasury. It is called Social Security!

Posted by Mangojulie | Report as abusive

This vote did not suprise me . Most people who want the government to Be ALL things!!!!,there provider,there purpose, there sustainer,there regulater,there protector,there sourse oy thinking AND there god.

Posted by gkjohn | Report as abusive

I am disappointed that the only 3 comments so far, have uniquely panned this clever, simple idea. The majority of respondents have voted in favor of offering an annuity option sponsored by the US Treasury. This annuity concept would be beneficial and give people security. Yes it is like social security only different. I am a long term financial planner and have been concerned that the IRA/401k/403b/annuity industry is established for the financial industry benefit instead of for the benefit of the tens of millions of potential retirees. Less than 25% of Americans are saving any where near enough to retire. Also, Social Security is being reduced in importance as the years go on. My grandmother lived almost exclusively from her social security check. Now that is more difficult. All of the financial industry products are fine for those who can afford them. But the majority of Americans need to be able to have something simpler and safer.
If the US Treasury allowed people to convert some of their savings to an annuity, the Treasury could benefit by having more debt financed by Americans, reminiscent of the War Bonds of the two World Wars.
These annuities would have to be offered by an independent commission who should structure the payout as a function of long term US Treasury current interest rates, current mortality tables and some kind of modest profit which would cover all costs, sales and otherwise, and then some. Other annuities might pay a better rate, but a US Treasury annuity would at least offer a stable reliable alternative. Chile and the United Kingdom currently require that their citizens purchase an annuity with at least a portion of their retirement savings. I believe that the USA would be best off if Americans understood better the risk of running out of money. We have definitely not thought through the options for the 3 to 4 million people annually who will be facing retirement. This annuity could be handled as a “Social Security buy extra”. Say the US Treasury’s independent commission forecast a Treasury bond rate to be 1.0% greater than inflation. A person who purchased an extra $100,000 of social security income at age 66 would be entitled to an extra $500 (woman)to $640 (man)per month in social security income. This could then be inflation adjusted over time.

Posted by Davebue | Report as abusive

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