Guaranteed Retirement Income Bill Legislation Likely in 2010

After pushing for health care legislation to cover millions of uninsured Americans last year, expect Congress in 2010 to begin efforts to help millions of American workers who don't have adequate retirement savings. After the recent recession wiped out $1.3 trillion in wealth, legislation offering incentives for workers to invest in financial vehicles that provide guaranteed retirement income has been proposed. The movement is gaining support from the insurance industry and retirement advocates.The key proposal to look for this year is the Retirement Security Needs Lifetime Pay Act, sponsored by U.S. Reps. Earl Pomeroy (D-N.D.) and Ginny Brown-Waite (R-Fla.). The act advocates tax breaks for the increased use of annuity products that pay income throughout retirement. Retirement experts also anticipate the reintroduction of the Automatic IRA Act of 2007, which would require small- and medium-sized businesses to automatically enroll their employees in an Individual Retirement Account.

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% "In 2010, the Obama administration is going to be focusing on the 70 million American workers who don't have access to retirement plans at their workplace," John Kalamarides, senior vice president of retirement solutions for Prudential (PRU), said last week as part of the firm's Global Markets and Retirement Outlook briefing.

Kalamarides said that the investor experience over the last 18 months has made it clear that retirement assets are not sufficiently protected against downside market risk. Even the most diligent savers may not be protected against the risk of outliving their assets. Finding ways for individuals to achieve a higher level of retirement security will become a major theme for the investment community as we begin the next decade.

Confusion Over Calculating Life Expectancy

Providers of guaranteed retirement income products like annuities are trying to get workers to stop viewing retirement as a lump sum of money, said Doug Dubitsky, vice president of product management for Guardian Life Insurance Co.. Instead, they're pushing the concept as a plan to produce income equal to their current salary for every year they expect to live after age 65.

Variable annuities and fixed annuities with guaranteed minimum withdrawal options can provide a stream of income that can't be outlived. The proposed legislation encourages the use of such products because recent studies show that many middle class Americans are at great risk of outliving their financial resources.

"Many people don't calculate life expectancy correctly," says Dubitsky. "You can correct a financial planning mistake when you are 45 or 50 and you are working, but if you make a major flaw in your financial planning and you get to be 85 years old, what are you going to do? Go back to work?"

As more Baby Boomers retire, the possibility of having many millions of Americans thrust into poverty after they've stopped working is becoming more menacing. The number of Americans retiring with company-sponsored pension benefits continues to decline, and many doubt whether Social Security will be around for the next generation.

Unclear Whether Bipartisan Support Exists

Legislation aimed at finding ways to provide guaranteed retirement income has had bipartisan support in the past. But it is unclear whether it can pass Congress after the recent battle over health care. Compensation and benefit strategies consultants from J.P. Morgan analyzed the proposals in December in a report, pointing out a number of issues that will have to be resolved before these proposals can be enacted in some form.

There are many complex issues that will need to be addressed if there is to be a mandate to provide guaranteed retirement income products to all workers. For starters, policy makers must settle on an acceptable level of tax benefits for investing in the products. They must also decide on contribution levels, the expenses and fees charged by providers and on who delivers on the guaranteed lifetime payout aspect of the product if a company defaults.

Insurers, who offer annuities, are pushing for the legislation because it could mean billions in mandated investment capital for them -- a kind of guaranteed lifetime income for insurance companies. While the idea of guaranteed retirement income is a welcome one, not everyone believes that mandating the use of annuities is the best way to get there.

MoneyWatch.com's Charlie Farrell
lays out a scenario in which, if you continue to invest your money during your retirement years, you could do better than what some guaranteed annuity products may offer. And as the guaranteed retirement income debate continues, the degree to which consumers understand how these products should be used will be critical to getting legislation passed and the products accepted widely.

"People need to understand what they are buying," Dubitsky warns. "They need to understand who they are buying it from and they need to understand what their needs are. The guarantees that are offered are only as good as the company offering them."

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