GAO Report Highlights Vital Role of Annuities

ANNUITIES

A report by the U.S. Government Accountability Office (GAO) provides a strong endorsement of annuities. For its report, GAO interviewed experts about recommended financial strategies for retirees. The financial experts typically recommend that retirees draw down their savings and convert a portion to an income annuity to cover necessary expenses or choose the annuity provided by an employer-sponsored defined benefit pension instead of a lump sum withdrawal. Experts also recommend delaying Social Security benefits until reaching at least full retirement age and, in some cases, continuing to work and save, if possible.

GAO profiled two with about $350,000 to $375,000 in net wealth. The experts recommended that these households purchase annuities with a portion of savings, drawdown of savings at an annual rate, such as 4% of the initial balance, use of lifetime income from the defined benefit plan, if applicable, and delay of Social Security.

They noted that strategies depend on individual circumstances including anticipated expenses, income level, health, and each household’s tolerance for risks, such as investment and longevity risk.

The GAO found that most retirees rely primarily on Social Security and pass up opportunities for additional lifetime retirement income. By taking Social Security benefits when they turn 62, many retirees born in 1943 pass up increases of at least 33% in their monthly inflation-adjusted Social Security benefit levels available at full retirement age of 66. Most retirees who left jobs with a defined benefit pension received or deferred lifetime benefits, but only 6% of those with a defined contribution plan chose or purchased an annuity at retirement. Those in the middle-income group who had savings typically drew down those savings gradually. Nonetheless, 9% of those 65 or older in 2009 had incomes below the poverty level (excluding any non-cash assistance). That compares to a poverty rate of 14.3% for people of all ages.

To help people make these often difficult choices, policy options include encouraging the availability of annuities in defined contribution plans and promoting financial literacy. Certain proposed policies seek to increase access to annuities in defined contribution plans, which may be able to provide them at lower cost for some people. However, some pension plan sponsors are reluctant to offer annuities for fear that their choice of annuity provider could make them vulnerable to litigation.

In addition to the current emphasis on saving for retirement, other proposed options aim to give consumers a better understanding of the risks and the choices that are available for managing income throughout retirement. Proposed options include providing additional federal publications and interactive tools, having sponsors issue notices to plan participants on the financial risks and choices they face during retirement, and providing estimates on lifetime annuity income on participants’ benefit statements.

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