Strategies for Promoting Lifetime Income in Retirement Savings Accounts

William G. Gale and
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

David C. John

May 19, 2010


Over the next two decades, an estimated 75 million Americans who were born during the postwar years will retire. A major challenge for them is how to allocate their resources when they do not know exactly how long they will live. If they live longer than expected, they face the dire prospect of running out of funds late in life. Alternatively, and perhaps equally unfortunately, they may be too conservative when drawing down their resources and may unnecessarily forgo consumption that they could safely have enjoyed earlier in their retirement.

Lifetime income can solve this planning problem. Individuals who exchange a portion of their retirement savings for guaranteed periodic lifetime payments are assured of never running out of resources. The annuitant has mitigated the risk of consuming too much too soon or consuming too little over time. The annuity provider assumes the risk that the annuitant may live longer than expected (which would require longer-than-expected payments), but can diversify and, therefore, spread this risk across a large pool of annuitants with different probable and actual life spans.

These comments to the RFI include two major proposals. First, we will discuss ways to use behavioral economics to increase the proportion of workers who choose to take a portion of their retirement savings in the form of guaranteed lifetime income products. Second, we will propose the creation of a federal guarantee on such products so that the worker is protected even if the company that sold the income product goes out of business.