Chile Shows that Regulations Determine how Market may Evolve for 401(k)s and Individual Accounts in Social Security
DALLAS (December 9, 2004) – The 43 million Americans who have invested in their employer’s 401(k) retirement program will face a difficult decision – what will they do with all the money they saved at the time they retire? Should they buy an annuity? Should they keep the investment and make monthly withdrawals? Baby boomers will face these questions soon
The large accumulations in private retirement accounts could force the nation’s fledgling annuity industry to blossom into a prosperous competitive market, according to the author of a new study unveiled today by the National Center for Policy Analysis (NCPA). The study examines Chile’s annuity market, and suggests it as a model for the U.S., especially as Congress begins to consider fundamental reforms to Social Security.
“The U.S. annuity market is currently small,” said Estelle James, author of the study. “This could change as participants in 401(k) type plans who have accumulated large sums begin to retire, and as social security is reformed to include individual accounts. The annuity market will develop rapidly if this is encouraged by regulations that govern the payout stage of retirement accounts.”
The 20-year old Chilean system shows what a healthy annuity market looks like and how it could solve many of the problems facing our retirement system. For insurance companies in Chile, the annuities market is larger than the life insurance market, a phenomena not seen anywhere else in the world. In Chile:
- Workers must choose between annuitization and programmed withdrawals from their personal retirement accounts. Government policies grant a competitive edge to insurance companies selling annuities. After 20-years, two-thirds of all retirees have chosen to purchase an annuity.
- Workers who choose an annuity, not wanting to outlive their retirement assets, turn their retirement accounts over to an insurance company, and receive a stable guaranteed income for life, indexed for inflation.
- Insurance companies in Chile market annuities aggressively and competition forces them to offer a high rate of return. The typical Chilean with an annuity gets back virtually his entire premium over his retired life.
- Insurance companies determine annuity payouts and bear the longevity and interest rate risk, and they are not permitted to charge explicit fees or sales commissions.
- Account holders who have accumulated enough funds to produce a pension that is at least 70 percent of the worker’s average wage over their final 10 working years can cash out the surplus and pass it on to their heirs.
- Workers can “retire” or annuitize, whenever they want–as long as they can purchase an annuity that meets the minimum required threshold. Those who choose to annuitize early can continue to work, but they are no longer required to contribute to their accounts. 60 percent of Chilean pensioners have “retired” early.
- Married men must purchase joint annuities; widows receive 60 percent of the husband’s annuity or 50 percent for the widow plus 15 percent for each dependent child. And in contrast to the U.S. Social Security system, working wives are allowed to keep both their own and the joint pension.
“As Congress looks to reform Social Security, the Chilean experience shows that under the right regulatory environment life insurance companies will quickly develop annuities as demand grows,” said James.
For the complete study: http://www.ncpathinktank.org/pub/st271/