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Take My Money—Please

Jul 05, 2008

Just because you're paranoid doesn't mean people aren't following you around.

Case in point: The Brookings Institution has just come up with a plan to grab my—and your—retirement nest egg. The plot is lovingly obfuscated in their recent publication, “Increasing Annuitization in 401(k) Plans with Automatic Trial Income.”

Now annuities, in and of themselves, are not evil. You have a certain amount accrued in your retirement accounts (IRAs, 401(k)s, pensions, etc.). When retirement comes, how are you going to assure that those funds are withdrawn in such a way that they will last as long as you do? One way is to purchase an annuity. For a set amount of up-front cash, the annuity provider will send you a monthly check for the rest of your (and your spouse's) life, however short or long that may be.

People don't buy annuities, according to the Brookings paper, for several reasons: they're too expensive, and potential customers are unfamiliar with them, biased against them, or too lazy to inform themselves. The solution: “[D]e­mand would increase and workers would be bet­ter off if market function improved and behavioral obstacles were circumvented or mitigated.” In circumvention of those pesky behavioral obstacles, the authors propose a sea change in 401(k) withdrawals that would see them automatically converted to two-year “trial” annuities, unless the retiree affirmatively opts out. At the end of the two-year period, the retiree would again have to affirmatively opt out in order to prevent the annuitization from becoming a lifetime commitment.

The current political climate, characterized in my view (as well as that of other eminently reasonable individuals) by corporate and executive branch gangsterism, would have us believe that we should make our own decisions regarding planning for retirement (i.e., privatize Social Security), until such time as we retire, when the pros will take over and relieve us of our funds as thoroughly, quickly, and automatically as possible. A default program such as that proposed by Brookings would provide a huge windfall for the corporate and Wall Street types who, for the past 30 years, have been busily sucking our nation's wealth up into the top one-tenth of one percent of the population.

Again, annuities are not evil, and they do offer a means—similar to Social Security benefits—of providing a dependable level of income over an unknown period of time. However, they are expensive (i.e., the lump-sum up-front purchase price does not currently translate into a very attractive monthly income, actuarially speaking). In other words, your peace of mind is bought at an unacceptably high price.

My alternative to the Brookings plan?: Let the greedy providers who are selling us these instruments look for less of a killing when they do so. How? Find a means to increase competition among providers, legislate for “plain English” prospectuses that don't require an MBA to understand; and then, perhaps, institute an opt-in plan for the automatic conversion of 401(k) payouts to trial annuities which this report describes.
tags: Economics | Retirement

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