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Could Variable Annuities Save Social Security?


With Social Security running deficits, politicians and academics are floating all sorts of proposals to “reform” the program. Most, if not all, focus on ways to cut retiree benefits. Some extend the age at which beneficiaries become eligible to receive a full benefit. Others tinker with the formula that determines beneficiaries’ annual cost of living raises.

Jerome Golden thinks there’s a better way.

Mr. Golden is widely known as the father of a complicated but popular insurance product, known as the variable annuity with living benefits. With these, it’s possible to receive a set annual income—-often, about 5% of your initial investment. If your investments do well, you may be able to lock in a higher income. But if they tank, the product offers ways in which you can protect yourself against outliving your money.

Mr. Golden says his plan would save Uncle Sam money without cutting retiree benefits. His goal: To offer Social Security recipients more choices in how they receive their benefits.

Currently, Social Security provides recipients with some flexibility. For example, a recipient can elect to begin his or her benefit checks at any point between ages 62 and 70. The longer a person defers, the higher his or her monthly income will be. (The system is designed to ensure that those who live to an average life expectancy receive the same total amount, no matter when they start taking benefits. Those who live beyond average life expectancy come out ahead by deferring.)

Mr. Golden’s plan would provide for more flexibility in how people receive their benefits. For example, he says, someone who plans to work to age 75 could defer until then—-or even beyond. As with the current system, those who defer would be entitled to higher monthly checks.

Someone who continues to work full-time until, say, age 65 and then gradually cuts back on hours would be able to gradually increase his or her benefits over time, Mr. Golden adds.

Yet another option: To take a lower up-front benefit in return for a much higher benefit down the road. Such a plan could help cover the costs of long-term-care.

Under Mr. Golden’s proposal, lump-sum distributions would be off-limits, simply because if enough people were to take that option, the system could collapse.

Mr. Golden concedes that there are many details that would have to be worked out. Moreover, he writes, “a significant number of Social Security beneficiaries would be expected to still take full benefits at their normal retirement age—because it’s their only or major source of retirement income.”

Still, he says, those who would take advantage of opportunities to defer some or all of their benefits would save the system money, at least in the short-term.

While it’s hard to know exactly how much this could save-—Mr. Golden cites figures of $200 billion to $400 billion over the next 20 years—-it is an interesting idea that could help retirees better match their future income and expenditures.


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    • I couldn’t disagree more with the CFP with 25yrs of experience. I understand that the cost for VAs is approx 3-4%. But bonds dont have the yield to outpace inflation – especially if I live for 30 yrs in retirement(65-95 like my parents). I need the equity market for returns. I like the VA because i can get the equity exposure AND guaranteed income for life (and my wife’s life). So what if my “principal” goes to zero if the market is bad… Pay me my income for life. If the market does return – my income can go up and lock in at the higher rates. I don’t think Bonds can do that.

    • The best way to `save` Socialist Insecurity is to deregulate it, & restore FICA payers` 10th Amendment rights. I didn`t hear any calls to save Bernie Madoff`s Ponzi scheme.

    • I’m a CFP with over 25 years investment experience. I have looked at these products many times. When you look under the hood you will find most annuities have expenses in the range of 3.3-3.7% per YEAR. Mortality and expense (1.3 to 1.5%), Guaranteed Withdrawal benefit (1%), mutual funds (1%). What the investor is left with, is likely no principal left at age 78 to 82, then they need to rely on the insurance company to provide income for their life (with no indexation of the income benefit). I’d rather take my chances on a portfolio of bond funds.

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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.