Social Security Reform: Implications of Private Annuities for Individual
Accounts (Letter Report, 07/30/1999, GAO/HEHS-99-160).
Pursuant to a congressional request, GAO provided information on the
implications of establishing individual social security accounts,
focusing on: (1) the effect individual social security accounts might
have on the existing annuities market; (2) factors that affect the
amount of annuity payments; and (3) the potential role of the federal
government in regulating the annuities market if individual accounts
were established.
GAO noted that: (1) the private annuities market could likely provide
annuities from individual accounts without significantly disrupting the
market; (2) GAO's work shows that the annuities market has grown over
the last 2 decades, with premium payments for annuity purchases
increasing from $22.4 billion in 1980 to over $197 billion in 1997; (3)
the amount of annuity-related reserves increased abut $172 billion to
over $1.4 trillion during the same period; (4) while the size of the
annuities market would significantly increase as a result of new annuity
purchases, these purchases would be phased in over a number of decades,
because in the initial years, few workers would have substantial savings
in their individual accounts when they retired; (5) this phase-in period
would give insurance companies and the annuities market considerable
time to adjust to the increasing amount of annuity purchases; (6)
however, according to the Society of Actuaries, some insurers may not
offer annuities for individual social security accounts because meeting
current reserve requirements could strain their financial resources; (7)
income from annuities based on individual accounts would depend on
account balances, interest rates, current and projected annual mortality
rates, and administrative and other costs charges by annuity providers
at the time individuals retire; (8) the effects of these factors on
annuity income could be mitigated if all retirees were required to
purchase annuities, the types of annuities individuals could purchase
were limited, or group annuities were purchased; (9) however, private
annuities would not be able to provide certain social security features,
such as fully indexed cost of living increases, without reducing initial
monthly annuity payments to retirees; (10) privately annuitizing
individual accounts could also have important consequences for the
existing federal-state structure of insurance regulation; (11) the
federal government's role in regulating annuities is currently limited;
under a system of individual accounts, this role could significantly
expand; (12) states have primary responsibility for regulating the
annuities market under their longstanding authority to regulate the
insurance industry; and (13) if payouts from individual accounts were to
increase the size of the annuities market, policymakers would need to
reevaluate the regulatory framework for the insurance industry to ensure
uniform protection for retirees' annuity income.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-99-160
TITLE: Social Security Reform: Implications of Private Annuities
for Individual Accounts
DATE: 07/30/1999
SUBJECT: Pensions
Social security benefits
Insurance regulation
Retirement benefits
Federal social security programs
Investment planning
Financial analysis
Future budget projections
IDENTIFIER: Old Age Survivors and Disability Insurance Program
Social Security Disability Insurance Trust Fund
Social Security Program
SSA Individual Account Program
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Report to the Ranking Minority Member, Committee on Ways and Means,
House of Representatives
July 1999
SOCIAL SECURITY REFORM -
IMPLICATIONS OF PRIVATE ANNUITIES
FOR INDIVIDUAL ACCOUNTS
GAO/HEHS-99-160
Individual Annuities in Social Security
(207047)
Abbreviations
=============================================================== ABBREV
DOL - Department of Labor
ERISA - Employee Retirement Income Security Act of 1974
NAIC - National Association of Insurance Commissioners
PBGC - Pension Benefit Guaranty Corporation
SSA - Social Security Administration
Letter
=============================================================== LETTER
B-282223
July 30, 1999
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives
Dear Mr. Rangel:
Social Security serves as the foundation of our retirement income
system, providing benefits to workers and their eligible spouses,
children, and survivors.\1
In 1998, the Social Security program provided $265 billion in
retirement benefits to about 31 million individuals and their
dependents. Currently, 148 million workers contribute to the program
in anticipation of future benefits. While Social Security has
successfully provided retirement income to millions of Americans, the
program faces significant future financial problems because of
demographic changes, including the aging of the baby boom generation
and increased life expectancy.
Many options exist for restoring the long-term solvency of the Social
Security program. Some proposed options include creating individual
retirement accounts, wherein participants would own and, to varying
degrees, manage their accounts. Benefits they received from their
accounts would generally be linked to the amount of their
contributions and their account investment returns. Individual
accounts offer the potential of higher rates of return by investing
in stocks and bonds than the implicit rate of return workers receive
on their Social Security contributions. However, individuals would
also face certain investment risks that could affect the security of
their retirement income.\2 Another concern about such proposals is
how the accounts would be paid out at retirement. We recently issued
two reports that provide information on the issues to consider when
designing and implementing a system of individual accounts.\3
Some Social Security reform proposals would require individuals to
purchase annuities at retirement with their individual account
balances to ensure that retirees do not outlive the income from their
accounts.\4 To better understand the potential effects such proposals
could have on retirement income, you asked us to (1) determine the
effect individual Social Security accounts might have on the existing
annuities market, (2) discuss factors that affect the amount of
annuity payments, and (3) discuss the potential role of the federal
government in regulating the annuities market if individual accounts
were established.
We conducted our work between December 1998 and July 1999 in
accordance with generally accepted government auditing standards.
(See app. I for information on our scope and methodology.)
--------------------
\1 The Disability Insurance portion of the Social Security program
provides benefits for disabled workers and their dependents.
\2 In a forthcoming report, we will discuss the difficulties in
comparing the rates of return for the current Social Security program
and private market investments.
\3 Social Security Reform: Implementation Issues for Individual
Accounts (GAO/HEHS-99-122, June 18, 1999) and Social Security Reform:
Administrative Costs for Individual Accounts Depend on System Design
(GAO/HEHS-99-131, June 18, 1999).
\4 An annuity is an insurance product that provides a stream of
payments for a pre-established amount of time in return for a premium
paymentthe amount being converted into an annuity. For example, a
life annuity provides payments for as long as the annuitant lives.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The private annuities market could likely provide annuities from
individual accounts without significantly disrupting the market. Our
work shows that the current annuities market has grown over the last
2 decades, with premium payments for annuity purchases increasing
from $22.4 billion in 1980 to over $197 billion in 1997.
Furthermore, the amount of annuity-related reserves--funds set aside
by insurers, as required by states, to pay future claims--increased
from about $172 billion to over $1.4 trillion during the same period.
Initially, payouts (when workers retire and begin drawing on their
individual accounts) would be small because most retiring workers
would not have built up substantial account balances before
retirement. If contributions to accounts were based on as much as 5
percent of earnings, it could take 20 years before the account
balances being converted into annuities in a year would equal the
current annuity purchases. If account balances were based on
contributions of 2 percent of earnings, it could take over 50 years
before the annual amounts being converted into annuities would equal
the amount of current annuity purchases. While the size of the
annuities market would significantly increase as a result of new
annuity purchases, these purchases would be phased in over a number
of decades, because in the initial years, few workers would have
substantial savings in their individual accounts when they retired.
This phase-in period would give insurance companies and the annuities
market considerable time to adjust to the increasing amount of
annuity purchases. However, according to the Society of Actuaries,
some insurers may not offer annuities for individual Social Security
accounts because meeting current reserve requirements could strain
their financial resources.
Income from annuities based on individual accounts would depend on
account balances, interest rates, current and projected annual
mortality rates, and administrative and other costs charged by
annuity providers at the time individuals retire. Individuals with
small account balances would likely have difficulty obtaining
individual annuities because of the relatively high cost of
annuitizing a small account balance; if they were to receive
annuitized monthly payments, these payments would be small. Because
interest rates fluctuate over time, the date individuals purchase
annuities can also significantly affect their annuity income. For
example, an individual with a $100,000 account balance would receive,
assuming no administrative or other expenses, about $810 a month if
the interest rate were 6 percent and about $910 per month if the
interest rate were 7.5 percent--about a 12 percent higher payment. A
reduction in expected mortality rates for retirees would also result
in smaller annuity payments because the purchase price of the annuity
must provide for a larger number of monthly payments. Finally,
administrative and other costs for individual annuities currently can
amount to as much as 15 percent of the amount being converted into an
annuity. The effects of these factors on annuity income could be
mitigated if all retirees were required to purchase annuities, the
types of annuities individuals could purchase were limited, or group
annuities were purchased. However, private annuities would not be
able to provide certain Social Security features, such as fully
indexed cost of living increases, without reducing initial monthly
annuity payments to retirees.
Privately annuitizing individual accounts could also have important
consequences for the existing federal-state structure of insurance
regulation. The federal government's role in regulating annuities is
currently limited; under a system of individual accounts, this role
could significantly expand. States have primary responsibility for
regulating the annuities market under their longstanding authority to
regulate the insurance industry. Each state develops its own laws
and regulations regarding the insurance industry's operations,
including the development and sale of annuities as well as the
protections afforded to annuitants. Individual state guaranty
associations are responsible for the guarantee of annuities in the
event of insurer insolvency. If payouts from individual accounts
were to increase the size of the annuities market, policymakers would
need to reevaluate the current regulatory framework for the insurance
industry to ensure uniform protection for retirees' annuity income.
BACKGROUND
------------------------------------------------------------ Letter :2
Only insurance companies can underwrite annuities in the United
States. Other financial intermediaries, such as banks and stock
brokerage firms, may sell annuities issued by insurance companies.
Annuities purchased by individuals directly from insurance companies
or through brokers or agents are termed individual annuities while
those purchased through group master contracts are termed group
annuities. Group master contracts are usually issued to employers
for the benefit of employees, and individual members of the group
hold certificates as evidence of their annuity. For example, federal
employees who participate in the Federal Thrift Savings Plan may,
upon retirement, purchase an annuity with their thrift savings
account balances through a contract between the Federal Retirement
Thrift Investment Board and Metropolitan Life Insurance Company.
Insurance companies determine the size of an annuity that can be
purchased for a given premium payment using assumptions about a
number of variables, including the following:\5
-- Interest Rates. The assumed interest rate is used to discount
projected payments and costs back to the annuity purchase date.
The rate should reflect current rates available in the capital
markets, adjusted to produce the insurer's target level of
profits desired from the annuity.
-- Mortality Rates. The assumed mortality rate reflects death
rates associated with known or assumed characteristics of the
annuitant population, with some adjustments to account for
future potential improvements in mortality. There are a number
of published tables available for pricing annuity products.\6
For example, the Society of Actuaries published the Annuity 2000
mortality tables for valuing individual annuities for
establishing reserves--funds set aside by insurers to pay future
claims. These tables, or adjustments to the tables, are
sometimes used for pricing individual annuities. In the private
market, separate mortality rate tables are generally used for
men and women, reflecting the lower mortality rates of females.
However, federal law requires employers to use combined male and
female mortality rates, termed "unisex rates," for annuities
purchased by employer-sponsored pension plans.
-- Administrative Expenses, Sales Costs, Taxes, and Other Costs.
Administrative charges for annuities, known as expense loads,
are included in the pricing formula. Commissions paid to agents
and brokers for explaining and selling annuities are payable at
issuance of the annuity, and some states charge premium taxes.
Insurance companies offer several premium payment options. Immediate
annuities are purchased with a single premium payment and usually
begin making payments 1 month after the annuity is purchased.
Premiums for deferred annuities are usually paid over several years.
At the time the contract holder wishes to access the deferred annuity
cash value, usually at retirement, one of three options might be
selected: (1) lump-sum distribution, (2) annuitization, or (3)
systematic withdrawals.
Insurance companies also offer several annuitization options. For
example, monthly income can be a fixed amount per month (fixed
annuity); a steadily increasing amount based on an index, such as the
Consumer Price Index (indexed annuity); or a variable amount based on
returns from investing the premium (variable annuity). Under a
single-life annuity, the annuitant receives a guaranteed stream of
payments that end with the annuitant's death. Under a joint-life
annuity, the payments continue to be made, sometimes at a reduced
rate, to a secondary annuitant on the death of the primary annuitant.
For a term-certain annuity, payments are not contingent on the
annuitant's life; instead, they are guaranteed for a specified period
of time, such as 5 or 10 years.
Although regulation of the insurance industry is generally a state
responsibility, several federal agencies play a role in regulating
annuities. The McCarran-Ferguson Act, enacted in 1945 to preserve
the traditional state regulation of the insurance industry, precludes
the application of federal statutes to the business of insurance,
unless they specifically relate to that business. The Employee
Retirement Income Security Act of 1974 (ERISA), which regulates
employee benefit plans, is a federal law that specifically relates to
insurance. Under ERISA, the Department of Labor (DOL) and Pension
Benefit Guaranty Corporation (PBGC) have issued regulations and other
guidance covering private employer-sponsored pension plans.\7
Additionally, variable annuities are regulated both as insurance
products by the states and as securities by the Securities and
Exchange Commission.
--------------------
\5 John L. Santoloci, Pricing and Product Development for Income
Annuities (Society of Actuaries, 1993).
\6 Mortality tables show, for hypothetical groups of individuals, the
number of individuals surviving at each age and the number of
individuals dying and the probability of dying within 1 year of
reaching a designated age.
\7 PBGC is the federal agency that provides benefits for participants
of insured-defined benefit plans that terminate with insufficient
assets to pay benefits.
PRIVATE ANNUITIES MARKET CAN
LIKELY PROVIDE ANNUITIES FOR
INDIVIDUAL ACCOUNTS
------------------------------------------------------------ Letter :3
Providing the annuities necessary to convert retirees' individual
account accumulations into a stream of monthly income is unlikely to
significantly disrupt the annuities market.\8 As shown in table 1,
total premiums (for group and individual annuity purchases) paid to
insurers increased from $22.4 billion in 1980 to $197.5 billion in
1997. Furthermore, the amount of annuity-related reserves increased
more than eightfold--from about $172 billion to over $1.4
trillion--during the same period. The demand for annuities in a
given year would depend on the number of retirees during the year,
the amount of their individual account balances at retirement, and
whether or not retirees are required to purchase an annuity on
retirement. If a large portion of the population purchased
annuities, these purchases could be phased in over a long period of
time, thereby allowing insurance companies to make the necessary
financial adjustments, such as finding sufficient investments to fund
their annuity payment obligations.
Table 1
Growth in Annuity Premiums, Annuitant
Income, and Insurance Company Reserves
Between 1940 and 1997 (Dollars in
Millions)
Total payments Policy
Year Premiums paid to annuitants reserves\a
---- ---------------- ---------------- ----------------
1940 $386 $176 NA
1960 1,341 830 $19,279
1980 22,429 10,195 171,960
1990 129,064 32,575 797,923
1997 197,529 55,080 1,454,962
----------------------------------------------------------
\a Funds set aside by insurance companies to pay policy obligations.
Source: Life Insurance Fact Book, 1998, American Council of Life
Insurance.
The figures in table 1 for 1997 annuity activity include certain
investment vehicles, such as deferred annuities, that are rarely
annuitized but, instead, can be used as tax-deferred investments. In
1997, premium payments for immediate annuities (individual and group)
were almost $48 billion or about 24 percent of all annuity premiums.
According to the Society of Actuaries, immediate annuities usually
have a different impact on insurance company reserves and surpluses
than deferred annuities. Selling immediate annuities usually causes
some strain on insurers' reserves and surpluses. To the extent that
increased annuity purchases strain the financial resources of some
insurers, the likelihood of insurance company insolvency would
increase and the ability of insurers to provide other types of
products might be lessened.
Funds used to purchase annuities would likely result in a shift of
funds among investment asset classes but would not represent a flow
of new funds into the capital markets. During the working years
(accumulation phase), workers' contributions to their individual
accounts would be invested in the capital markets. As workers
transition into retirement, the allocation of investments among asset
classes might change. For example, investments might be more heavily
weighted in equities than in fixed-income assets during the
accumulation phase. During the payout phase, investments might be
more heavily weighted in fixed-income assets.
Under some individual account proposals, it could be many years
before the annual amount of account balances being converted to
annuities would equal the amount of current annuity purchases. Two
reform proposals by the 1994-1996 Advisory Council on Social Security
illustrate this point. (See table 2.) One proposal would require
mandatory contributions of 1.6 percent covered payroll to individual
accounts, and the other would require contributions of 5 percent.
One proposal would also require the purchase of annuities, while the
other would permit but not require the purchase of annuities on
retirement. Both proposals assumed implementation would occur in
1998.
Table 2
Two Proposals by the 1994-1996 Advisory
Council on Social Security for Reforming
Individual Accounts
Propos Propos
al 1 al 2
------------------------------------------------------ ------ ------
Mandatory contributions (percentage of payroll) 1.6% 5.0%
Year distributions could begin 2000 2005
Total distributions in beginning year (billions in $2.9 $37.5
1998 dollars)
----------------------------------------------------------------------
Under the 1.6-percent proposal, in the year 2000, retirement
distributions from individual accounts would total about $2.9
billion, in 1998 dollars. Under the 5-percent proposal,
distributions would have begun in 2005, because initial participation
was limited to workers under age 55, but would start at a higher
amount, $37.5 billion.\9 Under contributions of 5 percent, it could
take 20 years from when workers first retire with individual accounts
before the annual amount of account balances being converted into
annuities would approach the amount of current annuity purchases.
Under contributions of 1.6 percent of payroll, it could take much
longer--beyond the year 2050--before individual account accumulations
being converted into annuities would approach the current amount of
annuity purchases.
--------------------
\8 For more information on the potential effects of individual
accounts on the capital markets, see our report Social Security:
Capital Markets and Educational Issues Associated With Individual
Accounts (GAO/GGD-99-115, June 28, 1999).
\9 SSA estimates were based on intermediate assumptions in the 1995
Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Insurance Trust Funds. We
converted the payroll amounts to 1998 constant year dollars using
intermediate inflation assumptions in the 1998 trust fund report.
INCOME FROM ANNUITIES WOULD
DEPEND ON SEVERAL FACTORS
------------------------------------------------------------ Letter :4
The size of individual accounts, interest and mortality rates, and
administrative and other costs all affect the amount of income
provided by an annuity. While these costs could significantly reduce
income from an annuity by reducing the amount of money available to
fund the annuity, options such as purchasing a group annuity for
retirees or limiting individual annuity choices would further reduce
them. However, private annuities may not be able to provide
fully-indexed cost-of-living increases because insurers might not be
able to find sufficient investments to protect themselves from
increases in inflation.
ACCOUNT SIZE AT RETIREMENT
IS A KEY FACTOR DETERMINING
ANNUITY INCOME
---------------------------------------------------------- Letter :4.1
The level of income that individuals would receive from converting
their account balances into annuities is primarily a function of the
size of those accounts at retirement. An individual's account
balance would depend on various factors such as the amount of wages
earned over the individual's working career, the percentage of those
wages that are deposited into the individual's Social Security
account, and investment earnings. Estimates of individual account
balances vary widely, but our estimates--based on contributions of 2
percent of earnings and various administrative expenses for setting
up and maintaining the accounts--provide insight into how much
individual account savings retirees might have to purchase annuities.
For example, our simulation suggests that a man born in 1984 with
average annual earnings who worked from age 22 to age 67 would
accumulate account balances of $75,995 if administrative expenses for
maintaining the account during accumulation were 2 percent annually,
or $125,430 if administrative expenses were 0.1 percent annually, in
1998 dollars. The same person opting for early retirement at age 62
would accumulate $65,214 with a 2 percent annual administrative cost,
or $100,303 if expenses were 0.1 percent annually.\10
Figure 1 shows the range of monthly annuities that individuals who
survive and retire at age 65 in the year 2000 could purchase, with
individual accounts ranging from $50,000 to $200,000 and
annuity-related expenses of 5 percent, 10 percent, and 15 percent.
For example, an individual with a $50,000 account balance, paying a
10-percent expense load would receive a $370 monthly annuity while
someone with a $100,000 account balance, and the same expense load,
would receive a $740 monthly annuity. The monthly annuities assume
an effective annual interest rate of 6 percent and unisex mortality
rates.
Figure 1: Monthly Annuities
for Persons Retiring at Age 65
in 2000 With Account Balances
Ranging From $50,000 to
$200,000 and Annuity Expenses
of 5, 10, and 15 Percent
(See figure in printed
edition.)
Note: Annuity expenses are expressed as a percentage of the single
premium. According to the Society of Actuaries, many insurance
companies may set their expense loads partially as a percentage of
premium, but also on a per policy basis, which could increase the
disparity between those with low versus high account balances.
Source: GAO calculations. (Our methodology and assumptions are
described in app. I.)
Individuals with small account balances at retirement could have
difficulty purchasing individual annuities under current market
conditions. They would receive smaller monthly annuity payments
because of the amount of money in the account available to purchase
an annuity, and they could pay a disproportionate amount of their
account balance for annuity-related administrative costs, further
reducing the amount available to fund their retirement income.
Moreover, insurance industry officials told us that it would be
inefficient and costly for insurers to provide annuities for
individuals with small accounts because of the cost of issuing
monthly checks and other administrative costs. Many annuity
purchases are currently with premiums of at least $100,000; under
some reform proposals, there could be many small accounts with
balances initially under $2,000.
Insurance industry officials told us that it would be less costly and
result in higher annuity payments if individuals received a group
annuity. This could be accomplished either by having the government
provide the annuity through the Social Security Administration (SSA)
or another government agency, or through a contract with private
insurers. For example, insurance companies could competitively bid
to provide group annuities for people retiring over a certain period.
People retiring during this period would be provided an annuity under
a master contract, rather than on an individual basis. Such
arrangements would enable individuals with small account balances to
access the annuities while reducing the administrative and other
costs they would pay. The extent to which group annuities could take
advantage of economies of scale and thus lower administrative costs
would depend, in part, on how the contracts were structured and
whether the federal government or annuity providers would be
responsible for administrative tasks such as maintaining records and
providing services to retirees, including explaining annuity options.
--------------------
\10 See app. I for more information on the interest rates and
assumptions used to estimate potential individual account balances.
LOW INTEREST RATE ASSUMPTION
WOULD RESULT IN LOWER
ANNUITIES
---------------------------------------------------------- Letter :4.2
Current and expected interest rate levels also affect the amount of
monthly income individuals would receive from annuities. The most
common way for insurance companies to invest premiums received from
the sale of annuities is to purchase corporate bonds, which typically
offer a higher rate of return than U.S. Treasury securities.
Essentially, the insurer pools the premiums and invests them by
buying corporate bonds.\11 Since interest rates fluctuate, the date
that a person retires could significantly affect the amount of
monthly income that could be purchased with a given premium payment.
For example, as figure 2 shows, the yield for 30-year U.S. Treasury
notes varied from about 5 to 15 percent and the yield for
investment-grade corporate bonds varied from about 7 to 17 percent
between February 1977 and 1999.
Figure 2: Yield for
Investment-Grade Corporate
Bonds and 30-Year U.S.
Treasury Bonds Between 1977 and
1999
(See figure in printed
edition.)
Source: Federal Reserve Board.
Individuals purchasing annuities in the private market also face risk
associated with the volatility in interest rates. As shown in figure
3, a change in the interest rate assumption used to price an annuity
can have a significant effect on the size of an individual's monthly
annuity. For example, assuming a 6-percent interest rate and no
administrative expenses, an individual purchasing a unisex annuity at
age 65 in the year 2000 with $100,000 would receive about $810 per
month. Another individual with an equivalent account balance but who
purchased an annuity during a period of higher interest rates, such
as 7.5 percent, would receive about $910 per month--a 12-percent
higher payment. Insurance company representatives told us that low
current interest rates--and the resulting low monthly annuities--is
one reason why relatively few deferred annuities and individual
retirement accounts are being converted to annuities.
Figure 3: Monthly Annuities
for Persons Retiring at Age 65
in 2000 with a $100,000 Premium
Payment, for Interest Rates
From 3 to 10 Percent
(See figure in printed
edition.)
Source: GAO calculations. (Our methodology and assumptions are
described in app. I.)
Without some mechanism to offset the effects of interest rate
volatility on annuity payments, requiring individuals to purchase
annuities in the private market will introduce an element of risk in
Social Security retirement income--a risk that does not currently
exist. One way to help protect retirees from interest rate
volatility is to allow individuals to determine when to purchase
annuities. For example, rather than requiring individuals to
purchase annuities immediately at retirement, they could be allowed
to maintain their individual accounts up to a certain period of time
after retirement. This could give them the opportunity to purchase
annuities when interest rates seem more favorable.\12 Another option
would be to allow individuals to purchase annuities in installments
over a specified number of years.
--------------------
\11 David Shapiro and Thomas F. Streiff, Annuities (Dearborn
Financial Publishing, Inc., 1992).
\12 Under federal tax law, retirees must begin receiving payouts from
retirement plans no later than April 1 of the year following their
retirement date or attainment of age 70-1/2, whichever comes later.
LOWER MORTALITY RATES WOULD
REDUCE ANNUITIES
---------------------------------------------------------- Letter :4.3
Changes in mortality assumptions would also affect the amount of
annuity payments future retirees will receive.\13 Reductions in the
probability that members of the annuitant population die at
designated ages would result in smaller monthly annuities for
individuals because there is an increased likelihood that each
succeeding payment will need to be made. The mortality tables
insurance companies use consider changes in medical diagnostics and
treatments, public health, and socioeconomic factors that affect life
expectancy. When annuitizing individual accounts, insurers would
also consider whether annuities would be mandatory or voluntary; the
anticipated mortality rate of the annuitant population; and whether
annuity calculations would be based on separate mortality tables for
men and women or on a unisex table, as the federal government uses.
Advances in medical diagnostics and treatment have helped reduce
mortality rates in the United States. Figure 4 shows that, according
to SSA's 1999 intermediate mortality assumptions, mortality rates for
persons who survive to age 65 are expected to continue to decrease.
For example, there is a 2.6-percent chance that a person born in 1900
who survives to age 65 will die within a year, a 1.6-percent chance
for a person born in 1950, and a 1.2-percent chance for a person born
in 2000. Persons born in 1950 and 2000 have a lower probability of
dying at each successive age and, therefore, a higher probability of
collecting each additional annuity payment than those born in 1900.
Consequently, as mortality decreases, more annuity payments will need
to be made and the monthly annuity payments will have to decrease to
account for the greater number of payments.
Figure 4: Mortality Rates, by
Age, for Persons Who Were Born
in 1900, 1950, and 2000 and
Survive to Age 65
(See figure in printed
edition.)
Source: GAO calculations. (Our methodology and assumptions are
described in app. I.)
Reductions in mortality rates mean that future retirees will receive
smaller monthly annuities, all else being equal. As shown in table
3, assuming a 6-percent interest rate and no administrative expenses,
persons aged 65 with $100,000 accounts could purchase monthly
annuities ranging from about $750 to about $890, depending on the
mortality assumption used to calculate the annuity's price.
Table 3
Estimated Monthly Annuities Purchased at
$100,000 for Persons Retiring at Age 65,
Assuming SSA Mortality Rates for Persons
Born in 1900, 1950, and 2000
Monthl
y
annuit
Birth year y
-------------------------------------------------------------- ------
1900 $890
1950 $800
2000 $750
----------------------------------------------------------------------
Note: Calculations assume a 6-percent interest rate and no expenses.
Source: GAO calculations. (Our methodology and assumptions are
described in app. I.)
Monthly annuity payments could also be influenced by a decision to
permit, rather than require, retirees to purchase annuities.
Individuals with a higher than average mortality risk, such as those
with serious illnesses or a family history of certain diseases, might
decide that annuities are too expensive for them and opt for another
form of payment. Adverse selection--the possibility that the
population of annuitants will experience more favorable mortality
rates than the population as a whole--is a problem that affects the
insurance industry, and companies construct mortality tables to
reflect the higher life expectancies of the annuitant population.
For example, the Annuity 2000 mortality table was developed for the
Society of Actuaries for use in the valuation of individual annuities
and, therefore, reflects the mortality characteristics of persons who
are expected to voluntarily purchase individual annuities. Table 4
shows that the Annuity 2000 mortality table results in significantly
smaller monthly annuities than SSA's mortality table.
Table 4
Estimated Monthly Annuity for Persons
Retiring at Age 65 in 2000 With a
$100,000 Premium Payment, and Using
Annuity 2000 and SSA Mortality Tables
Percentage
Annuity 2000\a SSA increase
---- ---------------- ---------------- ----------------
Men $750 $870 16%
Wome 700 770 10
n
----------------------------------------------------------
Note: Calculations assume a 6-percent interest rate and no expenses.
\a Unlike SSA mortality tables, published Annuity 2000 mortality
tables do not provide for improvements in future mortality rates that
might result from medical advances and other factors. We projected
mortality rate improvement beyond the year 2000 using the same scale
and percentages (100 percent of the projected improvement for males
and 50 percent for females) that were used to develop the Annuity
2000 basic tables.
Source: GAO calculations. (Our methodology and assumptions are
described in app. I.)
Mandating annuitization of individual account balances will likely
reduce the costs of purchasing annuities for the population at large,
but certain groups could be disadvantaged by such a requirement if
aggregate mortality tables were used to determine monthly payments.
For example, a mortality table based on unisex mortality rates,
instead of a gender-specific table, results in smaller annuities for
men, who have higher mortality rates than women, and higher annuities
for women, who have lower mortality rates. (See fig. 5 for
differences in mortality rates.) A 1983 Supreme Court decision found
that title VII of the Civil Rights Act, which applies to employment,
requires that employer-provided pension plans use unisex mortality
tables in calculating annuities, so that women and men with identical
salary and work histories receive the same monthly benefit.\14 The
individual annuities market, however, is not covered by the Supreme
Court ruling, and it is unclear whether or not annuities purchased
from savings in individual Social Security accounts would be covered
by the Court's ruling.
Figure 5: Average Life
Expectancy at Age 65 for Males
and Females Born in 1900
Through 1980 Based on SSA's
1999 Intermediate Mortality
Rates
(See figure in printed
edition.)
Source: SSA Office of the Chief Actuary.
Aggregate mortality tables might also disadvantage other
participants, such as lower-income individuals, whose mortality rates
appear to be higher than the population as a whole. An analysis of
research on mortality differentials indicates, for example, that in
addition to clear differences in sex, differences in income, race,
education, and marital status may correlate with differences in
mortality rates, although they may be more difficult to interpret.\15
To the extent group mortality rate differentials occur at ages beyond
age 65 and persist in the future, mandatory annuities that are priced
on the basis of aggregate mortality rates would result in the
redistribution of income from groups of individuals who die earlier,
on average, to those who die later. Annuities could be designed,
however, to reduce the effect of differentials in mortality rates.
For example, retirees could be given the option of purchasing a life
with term-certain annuity, wherein, if the annuitant died before the
end of a specified period, payments would continue to a beneficiary.
Payments to the beneficiary, however, would not continue beyond the
annuity's specified period.
--------------------
\13 All forms of retirement income, including Social Security and
private pensions, are subject to the risk of declining mortality.
\14 Arizona Governing Committee v. Norris, 463 U.S. 1073 (1983).
\15 Shripad Tuljapurkar and Carl Boe, "Mortality Change and
Forecasting: How Much and How Little Do We Know?," North American
Actuarial Journal, Vol. 2, No. 4 (Society of Actuaries, Oct.
1998).
ADMINISTRATIVE AND OTHER
EXPENSES REDUCE RETIREES'
ANNUITY INCOME
---------------------------------------------------------- Letter :4.4
Expected administrative and other expenses charged by insurance
companies would also reduce annuity income. The costs of setting up
annuity accounts, paying commissions, tracking payments, managing
assets, and paying taxes are reflected in annuity prices. Although
commission rates typically range from 3 to 6 percent of the amount
used to purchase the annuity, they can vary as widely as 0 to more
than 10 percent.\16 Generally, any increase in expected operating
expenses would result in smaller annuities, assuming that other
factors remain unchanged. Figure 6 shows, for example, that
increasing annuity loads from 0 to 15 percent would reduce monthly
annuities by about $100 for persons retiring at age 65 in the year
2000 with an account balance of $100,000.
Figure 6: Monthly Annuities
for Persons Retiring at Age 65
in 2000 with a $100,000 Premium
Payment, for Expense Loads From
0 to 15 Percent
(See figure in printed
edition.)
Note: Calculations assume a 6-percent interest rate.
Source: GAO calculations. (Our methodology and assumptions are
described in app. I.)
Administrative and other expenses for private annuities would vary
depending on how accounts were annuitized. A 1997 analysis found
that prices charged for immediate, fixed, life annuities varied
widely,\17 with about a 20-percent difference between the highest and
lowest groups of monthly annuity payments paid by insurance
companies. Assuming a typical investment portfolio of
investment-grade bonds, the study estimated that, in 1995, commercial
insurance companies allowed about 14 to 18 percent of annuity
premiums to cover marketing costs, corporate overhead and income
taxes, additions to various company contingency reserves, and
profits. The remainder of the annuity premium is used to pay the
annuity. Although the study also found that costs have declined
since the early 1980s, a January 1999 analysis indicates that total
expenses for immediate annuities purchased in the individual annuity
market could be as high as about 15 percent of the amount being
converted into an annuity.\18
Several options exist that could lower administrative costs. For
example, having the federal government provide the annuities or
contract with private insurers to provide group annuities could
reduce administrative and sales costs because annuities would not be
marketed on an individual basis. Limiting the number of annuity
purchase options could further reduce costs because insurers would
not have the additional costs associated with marketing and selling
numerous products to retirees with Social Security individual
accounts. However, as long as individuals determine whether to
annuitize their account balances, the types of annuity purchased, and
the age at which they retire, options for reducing annuity costs are
limited.
--------------------
\16 Annuities Around the World, LIMRA (1998).
\17 Olivia S. Mitchell and others, New Evidence on the Money's Worth
of Individual Annuities, National Bureau of Economic Research Working
Paper 6002 (Apr. 1997).
\18 James M. Poterba and Mark J. Warshawsky, The Costs of
Annuitizing Retirement Payouts From Individual Accounts, National
Bureau of Economic Research Working Paper 6918 (Jan. 1999).
PRIVATE SECTOR ANNUITIES MAY
NOT BE ABLE TO PROVIDE
CERTAIN SOCIAL SECURITY
BENEFITS
---------------------------------------------------------- Letter :4.5
While private annuities could be structured in a way that reduces
administrative and other costs, they may not be able to replicate
Social Security benefits. Social Security benefits are currently
calculated using workers' 35 years of highest earnings, and benefits
are provided to workers' spouses, children, and survivors. The
system also has a redistributive component, which weights benefits in
favor of families and lower-income workers. Additionally, Social
Security benefits are fully indexed for inflation.
Generally, annuities sold in the United States do not provide full
inflation protection; instead, retirees can purchase indexed or
variable annuities. Indexed annuity payment increases may be limited
to a maximum percentage annually, regardless of increases (and
decreases) in inflation rates. Variable annuities might also provide
inflation protection, but only as long as investment returns meet or
exceed the rate of inflation. Investment returns are not guaranteed,
and variable annuities generally have higher administrative costs
than fixed annuities.
Requiring annuities to be fully indexed for inflation would reduce
initial monthly annuity payments. Insurance company officials stated
that issuers providing inflation-indexed annuities might hedge the
inflation risk by investing in shorter-term securities and
inflation-adjusted Treasury securities, which typically have lower
investment returns than longer-term and non-indexed securities.
Consequently, retirees would receive lower initial monthly annuity
payments in exchange for inflation protection.
Private annuities also may not be able to provide auxiliary benefits
similar to those under the Social Security program. To calculate
Social Security benefits, a progressive benefit formula is used that
replaces a relatively larger portion of lifetime earnings for people
with low earnings than for people with high earnings. Furthermore,
Social Security provides auxiliary benefits to workers' eligible
spouses, children, and survivors without reducing the size of the
worker's own annuity. It is unlikely that a private annuity could be
designed that provides the same benefits. For example, an annuity
calculated on the basis of expected interest rates, mortality rates,
and expenses would not replace the benefit that Social Security
currently provides to nonworking spouses.\19 Furthermore, under a
joint life annuity, the primary annuitant must accept less monthly
income than under a single life annuity.
--------------------
\19 In general, a retired worker's spouse who is not entitled to
benefits under his or her own work record will receive a benefit up
to 50 percent of the retired worker's benefit. The spousal benefit
does not reduce the size of the worker's own benefit.
FEDERAL REGULATION OF THE
ANNUITIES MARKET COULD EXPAND
UNDER A SYSTEM OF INDIVIDUAL
ACCOUNTS
------------------------------------------------------------ Letter :5
Providing annuities to Social Security recipients through the private
market could have important consequences for the existing structure
of insurance regulation. If individual accounts were established,
federal regulation of annuities could potentially expand to include
such matters as establishing and enforcing solvency requirements and
providing a guaranty program. Currently, the federal government has
a limited role in the regulation and oversight of certain annuities;
however, it does not guarantee these annuities in the case of insurer
insolvency. States have primary responsibility for regulation of the
insurance industry, including solvency and guaranty requirements.
However, insurance department oversight and guaranty levels vary
among states and could result in unequal treatment of retirees.
Furthermore, retiree annuity values could sometimes exceed state
guaranty limits.
FEDERAL GOVERNMENT HAS A
LIMITED ROLE IN REGULATING
ANNUITIES
---------------------------------------------------------- Letter :5.1
The federal government has a limited role in regulating the annuities
market. DOL and PBGC enforce regulations under ERISA on the
selection of annuity providers by private pension plans. DOL
provides guidance concerning the selection of annuity providers to
make sure plan sponsors follow their fiduciary responsibilities--that
is, they act solely in the best interest of participants and
generally select the safest annuity available. PBGC rules require
administrators responsible for terminating private pension plans to
provide participants and beneficiaries with information on state
guaranty association coverage of annuities. Neither DOL nor PBGC is
authorized to establish or enforce solvency and guaranty requirements
on private annuities. Variable annuities, because they are
considered to be both insurance and securities, are regulated by the
Securities and Exchange Commission and are subject to the antifraud
and related disclosure provisions of the Securities Act of 1933, the
Securities Exchange Act of 1934, and the Investment Company Act of
1940.
STATE REGULATION OF
ANNUITIES VARIES
---------------------------------------------------------- Letter :5.2
States have primary responsibility for regulating the insurance
industry, including individual and group annuities. State insurance
departments license companies to sell insurance; examine the
financial health of companies; and administer, as necessary, the
liquidation of insolvent insurers. They also regulate annuity
products, including establishing reserve requirements, investment
restrictions, and solvency guarantees.\20 Some states also generate
tax revenue from sales of insurance products.
Regulation and oversight of the insurance market varies by state.
The size of insurance departments also varies, depending on the size
of their markets and the number of insurance companies headquartered
in their state. Consequently, some individual state insurance
departments have faced difficulties regulating the large, interstate
insurance industry and have used the National Association of
Insurance Commissioners (NAIC) to establish model laws and coordinate
national regulatory activities.\21
--------------------
\20 Gerard M. Brannon, Public Policy and Life Insurance, The
Financial Condition and Regulation of Insurance Companies, Conference
Series No. 35 (Federal Reserve Bank of Boston, June 1991).
\21 NAIC consists of the heads of the insurance departments of the 50
states, the District of Columbia, and 4 U.S. territories.
INSOLVENCY GUARANTIES MAY
NOT FULLY PROTECT RETIREES'
ANNUITY INCOMES
---------------------------------------------------------- Letter :5.3
Differences in state guaranty limits can result in unequal treatment
of retirees receiving annuities from the same failed insurer and may
not fully protect retirees' annuity income. Each state has an
insolvency guaranty law that provides some protection to
policyholders or annuitants from financial losses due to insolvent
insurers. To pay an insolvent company's obligations, the guaranty
association in each state where the company did business assesses the
solvent insurers doing business in the state. These associations,
however, are limited in the amount of assessments they can make each
year. Furthermore, they are not state agencies, and state insurance
departments are not responsible for paying the obligations of an
insolvent insurer. To help promote uniformity in guaranty coverage,
NAIC has established a Life and Health Insurance Guaranty Association
Model Act. Although all states have adopted versions of the model,
there are substantial differences among the states in its
implementation. Moreover, the current guaranty association structure
has a number of weaknesses:\22
-- Coverage is not uniform across states. As a result, two
individuals having identical insurance with the same failed
insurer can receive substantially different payments depending
on their state of residence.
-- Each state's guaranty association can act independently of the
other associations, although the National Organization of Life
and Health Insurance Guaranty Associations helps achieve
uniformity across the country.
-- There is the potential that a large insolvency or series of
insolvencies might overwhelm the ability of each state's
guaranty association to provide full, uninterrupted payments to
annuitants. For example, in March 1993, we reported that 44,000
retirees with the Executive Life Insurance Company received only
70 percent of their annuities for almost 13 months after
California regulators seized control of the company.\23
Retirees whose annuity values exceed the limit of the guaranty
association risk losing a portion of their benefits should an insurer
fail. According to the National Organization of Life and Health
Insurance Guaranty Associations, in 1998, 44 states limit the
obligations of their guaranty associations for annuities to
$100,000--the limit recommended by NAIC. Four states have a $300,000
limit, while two others limit their guaranty to $500,000. As an
individual account system matures, some workers could have account
balances exceeding $100,000 when they retire. Under current state
guaranty coverage, the total value of their annuities would not be
protected. Furthermore, the number of retirees whose annuities would
not be fully protected by state guaranty associations would likely
increase over time because most state insurance coverage limits are
not indexed to inflation.
--------------------
\22 Kenneth Black, Jr., and Harold D. Skipper, Jr., Life Insurance,
12th ed. (Prentice Hall, 1994).
\23 Private Pensions: Protections for Retirees' Insurance Annuities
Can Be Strengthened (GAO/HRD-93-29, Mar. 31, 1993).
OPTIONS FOR A FEDERAL
GUARANTY OF ANNUITIES
---------------------------------------------------------- Letter :5.4
Currently, the federal government does not guarantee private
annuities. Consequently, retirees who purchased annuities with their
individual accounts would have to rely on the protections provided by
state regulators and guaranty associations. Some policy analysts
have proposed extending a federal guaranty to annuities purchases.
Options for a federal guaranty include having a government entity
guarantee annuities purchased with funds from individual accounts or
establishing a national insurance guaranty fund. For example,
insurers providing annuities for individual Social Security accounts
could be required to pay a guaranty premium to a federal guaranty
agency. The agency would then pay the outstanding annuity
obligations of an insolvent insurer. However, this option faces
several difficulties. First, unless the federal government began
regulating insurers, it would lack any ability to control its
liability for the annuities. Second, to establish appropriate
premium levels, the government agency would have to become proficient
in rating the risk of insurance company failure. Third, a federal
guaranty agency would place additional regulatory burdens on insurers
as well as on the federal government. Finally, any additional cost
for a federal guaranty program would likely be passed on to
annuitants in the form of smaller monthly payments. A national
guaranty fund--whereby a national corporation would collect
assessments from insurance companies and administer guaranty payments
to annuitants after an insurer becomes insolvent--would face similar
challenges.
CONCLUSIONS
------------------------------------------------------------ Letter :6
The private annuitization of individual accounts is one of many
important issues to consider when deciding whether and how to create
a system of individual accounts as a part of Social Security reform.
While the private annuities market is likely to be able to provide
annuities for individual accounts without disrupting the market, how
these annuities are structured will significantly affect retirees'
income. Although requiring individuals to purchase annuities with
their individual account balances would help preserve their income
throughout retirement, such a requirement would also expose retirees
to risks and costs that they do not face under the current Social
Security system. There are options that would somewhat mitigate the
effects of various costs on annuity payments, but some would require
limiting the payout choices available to individuals when they
retire.
If individual accounts were established, individuals would need to
fully understand the factors affecting their annuity income as well
as the extent to which their annuities are protected. Also, if
individuals were required to purchase annuities, the federal
government would potentially need to play some role in either
ensuring that insurance markets worked efficiently or providing
annuities when the private market failed to do so. Furthermore, to
protect retirees and ensure equal treatment of all annuitants, the
government might have to establish standardized solvency requirements
for insurance companies and uniform guaranty protections for
annuitants. However, policymakers would need to balance the states'
longstanding authority to regulate insurance markets with the desire
for uniform protections for retirees purchasing annuities with their
individual accounts.
AGENCY AND OTHER COMMENTS
------------------------------------------------------------ Letter :7
We provided a draft of this report to SSA, the American Council of
Life Insurance, the National Organization of Life and Health
Insurance Guaranty Associations, the Society of Actuaries, and
federal government actuaries. They provided oral or written comments
that were primarily technical and clarifying in nature, which we
incorporated as appropriate. In commenting on our report, the
reviewers generally agreed with our characterization of the factors
that influence monthly annuity payments and our discussion on the
implications of privately annuitizing individual Social Security
accounts. In addition to its technical comments, SSA stated that our
report brought necessary attention to the risks facing consumers in
the private market. It suggested, however, that we expand our
discussion to include how individuals (eligible spouses, children,
and survivors) receiving auxiliary Social Security benefits would be
affected under a system of individual accounts. Because we addressed
this issue in a prior GAO report, we did not expand on it in this
report.\24 SSA also recommended that we include information on how
individual annuities are sold and the potential that annuity
purchasers could make unwise decisions. Our report highlights the
need for individuals to understand the factors and decisions that can
affect their annuity income. We have also pointed out in recent
reports that increased education to help improve participants'
understanding of the consequences of such decisions on their
retirement income would be an important part of any reform proposal
that included individual Social Security accounts.\25 SSA's letter is
reprinted as appendix II.
--------------------
\24 Social Security: Different Approaches for Addressing Program
Solvency (GAO/HEHS-98-33, July 22, 1998).
\25 GAO/HEHS-99-122 and GAO/GGD-99-115.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to the Honorable Bill Archer,
Chairman, House Ways and Means Committee; other relevant
congressional committees; the Commissioner of Social Security; the
Secretary of Labor; and the Executive Director of PBGC. Copies will
also be made available to others on request. If you or your staff
have any questions, please contact me on (202) 512-7215. Major
contributors to this report include Charles A. Jeszeck, George A.
Scott, and John M. Schaefer.
Sincerely yours,
Barbara D. Bovbjerg
Associate Director
Education, Workforce, and
Income Security Issues
SCOPE AND METHODOLOGY
=========================================================== Appendix I
To review the likely effect of individual accounts on the annuities
market, we analyzed estimates of account accumulations and
information on sales trends in the annuities market. To estimate
potential individual account balances, we made a number of
assumptions. With respect to population and economic projections,
including returns on investment and projected wages, we used the same
assumptions as those used to produce the intermediate-range
assumptions of the 1999 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance
Trust Funds. This resulted in a 10.3-percent nominal rate of return
for corporate stocks (or about a 7-percent real rate of return) and a
6.3-percent nominal return on Treasury bonds (or about a 3-percent
real return). (See GAO/HEHS-99-131 for additional information on our
assumptions.) To identify the factors that affect annuity payments,
we discussed the pricing of annuities with insurance industry and
government actuaries and reviewed literature on the pricing of
annuities.
To examine the effect on annuities of these factors, we calculated
the present expected value of life-contingent annuities, payable in
equal monthly installments at the end of the month, to persons who
would survive to and retire at age 65 in the year 2000. The present
value was calculated to adjust future annuity payments for the time
value of money. The time value of money refers to the fact that a
dollar received today is worth more than a dollar received some date
in the future because the dollar received today can be invested and
earn interest. The expected value was calculated to adjust future
payments for the probability that individuals would not be alive to
collect them.
Discount factors, based on assumed interest rates, determine the
present value of future annuity payments. For each interest rate
used in the analysis, we calculated monthly discount factors assuming
the rate remained level from the start of annuity payments until the
mortality table indicated no more persons remained alive to collect
an annuity. Before discounting, we converted effective annual
interest rates to nominal rates, compounded monthly.
Mortality rates determine the expected value of future payments. We
obtained mortality rates from tables published by SSA and the Society
of Actuaries. SSA mortality tables were prepared in support of
intermediate estimates in the 1999 Annual Report of the Board of
Trustees of the Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds, and we used them to examine the
probability that individuals, representative of the U.S. population
as a whole, would survive to collect each annuity check. Since the
tables provided annual mortality rates, we estimated monthly rates
assuming that deaths were evenly distributed during the year. Since
the tables provided separate mortality rates for males and females,
we constructed unisex rates by computing a weighted average rate for
men and women who would survive to retire at age 65, as indicated by
the SSA estimates. For example, for persons born in 1935 and
retiring at age 65 in the year 2000, we used the distribution at age
65 of 46.5 percent men and 53.5 percent women.
To calculate the present expected value for each month, we (1)
multiplied the amount of the annuity (initially $1) by the number of
annuitants who are expected to survive to collect it and by the
appropriate discount factor and (2) totaled the monthly discounted
payments to surviving annuitants, dividing that total by the number
of annuitants alive at age 65. The present expected value, when
adjusted for expenses, is the price of a $1 monthly, life-contingent,
ordinary annuity. We then divided the number of dollars available to
purchase an annuity, by the price of a $1 monthly annuity, to
determine the number of dollars of monthly annuity that could be
purchased by an individual.
We interviewed officials from the National Association of Insurance
Commissioners, National Organization of Life and Health Guaranty
Associations, and the Pension Benefit Guaranty Corporation to discuss
the potential role of federal regulation of the annuities market. We
also interviewed insurance industry officials and researchers from
the American Council of Life Insurance, LIMRA, as well as pension
experts and actuaries.
(See figure in printed edition.)Appendix II
COMMENTS FROM THE SOCIAL SECURITY
ADMINISTRATION
=========================================================== Appendix I
(See figure in printed edition.)
*** End of document. ***