Monday, March 8, 2010
Jeffrey Brown (University of Illinois, College of Business) presents Automatic Lifetime Income as a Path to Retirement Income Security at Northwestern today as part of its Advanced Topics in Taxation Series organized by Tom Brennan and Charlotte Crane. Here is the abstract:
This paper proposes that policymakers encourage “automatic annuitization” so that it becomes an integral part of defined contribution retirement plan design in the U.S. A large body of research in economics indicates that life annuities are the most cost-effective way to provide guaranteed income that will last for as long as an individual lives and that, as a result, annuities ought to play a central role in the portfolio of most retirees. Unfortunately, for a variety of historical, regulatory and behavioral reasons, most participants in defined contribution plans (such as 401(k) and 403(b) plans) do not currently have access to guaranteed income options through their employer’s plan. An emerging body of evidence suggests that making life annuities the “default” payout option from defined contribution retirement plans may be an effective way to increase annuitization rates and therefore an effective way to boost retirement income security of future retirees. The paper discusses a general outline for how such an automatic annuitization program could be implemented so as to increase participant choice, encourage annuitization for the majority of households for whom annuities would enhance retirement security, and limit the administrative burden on plan sponsors.