Retirement solvency “a growing challenge” says GAO

July 1, 2011

The risk that retirees will outlive their assets is a growing challenge, the federal Government Accountability Office said in a not-so-newsy report released on Friday. To meet that challenge, experts advise retirees to delay the start of their Social Security benefits, avoid spending down their nest eggs too fast and consider using annuities in some situations, says the study.

The report could be used to nudge forward policy initiatives already under consideration that would encourage companies to offer annuity choices to their retiring workers. The report was requested by Senator Herb Kohl, chairman of the Senate Special Committee on Aging. He has cosponsored a bill, called the Lifetime Income Disclosure Act, that would require 401(k) statements to include an annuity equivalent number — the amount of monthly income that the savings accumulated would support.

The Treasury Department has asked for public comment on the idea that employers, given some safe harbor against lawsuits, could encourage workers with 401(k) accounts to annuitize their savings. Mark Iwry, the Treasury Department official who has been looking at these retirement issues, commented in a letter to the GAO. “We will take the information and analysis in the report into account as we consider guidance to issue.”

To conduct the study, the GAO created sample retiree profiles at varying income levels, with and without defined benefit pension plans. It then asked a host of experts within the financial services industry, academia and a “retiree interest group” (I’m going to guess that it was AARP) how they would advise retirees with those profiles to protect their income for the long haul.

The experts generally recommended familiar strategies: (1) leave your money in your defined benefit plan and take an annuity instead of a lump sum; (2) make systematic (and not unreasonably high) regular withdrawals from your savings; (3) delay the start of your Social Security benefits; and (4) consider buying an income annuity to cover some basic expenses for the rest of life.

The GAO also surveyed retirees to see if they were following that advice and found, in general, that they were not. Roughly half of retirees take their Social Security benefits before their 63rd birthday, according to data cited in the report.

The experts surveyed by the GAO suggested that middle-net worth households that did not already have a defined benefit plan could gain the biggest advantage from buying income annuities, in which a sum of money buys a guaranteed lifetime monthly stream of income. “They should consider using a portion, such as half of their $191,000 in financial assets to purchase an inflation-adjusted annuity,” the report says, noting that it would provide an additional $355 per month until the death of the last surviving spouse, and grow in subsequent years with the Consumer Price Index.

The insurance industry jumped at that, immediately putting out a press release titled “GAO Report Highlights Vital Role Annuities Can Play in Helping People Secure a Paycheck for Life.”  But in fact, the government report only supported annuities in that most narrow situation, and made several other recommendations that went the other way, including these points:

* Annuities aren’t the cheapest approach. “Delaying Social Security is more cost effective than purchasing an annuity to enhance retirement income” the study says. “The amount of money that a retiree would forgo by waiting to start benefits until age 66 is less than the amount needed to purchase an annuity that would provide the additional monthly income available by waiting until full retirement age.”

* Wealthy retirees don’t need annuities. Sample families that had more than $1.5 million in net worth “had sufficient resources to go without annuities, unless the individuals were very risk averse and felt the need for additional protection for longevity” experts told the GAO.

* Poor retirees may not be able to afford them. “The experts we spoke to recommended … that the lowest quintile household (with net worth of $2,000 or less) accumulate some precautionary cash savings before purchasing an annuity or investing in securities.”

Now what? Between debt ceiling debates and other pressing matters, Congress and the Treasury may not jump into changing the retirement landscape very soon. But the approaches raised by Iwry and Kohl suggest policymakers are considering subtle and not-so-subtle ways to push workers towards more conservative retirement income strategies. The GAO study may just add some heft to the arm twisting.

3 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

How about kicking Bernanke out of office and start paying retirees more than .5% interest on their savings.

Posted by minipaws | Report as abusive

[…] Retirement solvency “a growing challenge” says GAO | Reuters WealthRetirees aren't following expert advice on stretching their retirement dollars, despite the risk of outliving their assets. Will policymakers push workers to be smarter about their retirement money? <> […]

Posted by Delay Taking Social Security, Add Annuity to Survive Retirement, GAO Says | Latest Live News Update | Report as abusive

[…] Retirement solvency “a growing challenge” says GAO | Reuters WealthRetirees aren't following expert advice on stretching their retirement dollars, despite the risk of outliving their assets. Will policymakers push workers to be smarter about their retirement money? <> […]

Posted by Delay Taking Social Security, Add Annuity to Survive Retirement, GAO Says &#8211; Latest Live News Update | Report as abusive

[…] Reuters Blogs (blog) […]

Posted by Retirees should delay social security, add annuity, GAO says &#8211; Stamford Advocate &laquo; Brokers News Center | Report as abusive

[…] Read more about financial expert’s advice for avoiding the longevity risk of renewed life expectancy at Reuters. […]

Posted by Financial Experts Advice Against Seeking Social Security Benefits | Expert Financial Planning | Report as abusive

Something to look forward to when I retire…

Posted by AnthonyInVA | Report as abusive

I know it’s tough for policy makers to understand this but no amount of changes in policy will ever get people to prepare for retirement. The problem is part of our social mindset to avoid anything that has the slightest bit of discomfort today with a payoff that is 40 years in the future such as preparing for retirement.

Posted by bobrichards | Report as abusive