Opinions on longevity annuities

[nun]

Quote:

Originally Posted by pb4uski That is why I qualified it with the term "deferred start". And I think of longevity insurance as that which does start at say age 85 and am aware that you could buy a SPIA that starts at RMD age in an IRA and it gets carved out of the RMD calculation.

I'm thinking in terms of my TIAA-Traditional annuity. I made contributions to it back in the late 1980s and I haven't touched it since. It's simply sat as part of an old 401a account and compounded over the years with a guaranteed minimum of 3%, but the annual average has been 6% and this year the declared interest rate is 4.7%. I can only defer taking income up to 70.5 when RMDs have to be satisfied. So it's sort of half way between an SPIA and longevity insurance.

[Chuckanut]

Quote:

Originally Posted by pb4uski The shame is that there are a combination of various actions that they could take now that would save SS and while they would be unpopular with certain constituencies, they could be done without a lot of hardship. However, our politicians lack courage and just keep ignoring the problem but the longer that they fail to act the more extreme the impacts will be. Sad. [/url]

IIRC, former Senator Simpson claimed that the SS problem could be solved into the foreseeable future by gradually raising the full retirement age to 69 over a period of 20 years.

Given how much longer we are living, I don't see that as a problem, but...... we would need to find a way to keep older people working and avoid age discrimination. Perhaps a phased reduction in hours?

My fear is that people would be laid off in their 50's or early 60's and be forced to drain their retirement accounts in order to survive until they get SS. I saw that situation occur for several acquaintances a few years back. It's not pretty.

[Independent]

Quote:

Originally Posted by pb4uski I was very surprised that eliminating the cap alone solved 100% of the problem... I suspect because it is really banging those with very high incomes compared to the current approach. But my point is that there are some things that could be done that are relatively modest in the whole scheme of things but the longer they wait the more difficult it will be.

I was surprised, too.
Then I went to the SS website and found this Long Range Solvency Provisions

I can't explain the discrepancy.

[nun]

Quote:

Originally Posted by Chuckanut IIRC, former Senator Simpson claimed that the SS problem could be solved into the foreseeable future by gradually raising the full retirement age to 69 over a period of 20 years. Given how much longer we are living, I don't see that as a problem, but...... we would need to find a way to keep older people working and avoid age discrimination. Perhaps a phased reduction in hours? My fear is that people would be laid off in their 50's or early 60's and be forced to drain their retirement accounts in order to survive until they get SS. I saw that situation occur for several acquaintances a few years back. It's not pretty.

I remember Sen. Simpson. When I was a Green Card holder and had 11 years of FICA payments he suggested reducing SS benefits for non citizens...not popular with me.

You might be interested to read about the new flat rate SS system the UK has just introduced. Along with increasing retirement age all connection to earnings has been eliminated. It only depends on the number of contributing years you have, not the amount you pay. This is being implemented by a Conservation government.

The Flat Rate State Pension: FAQ | money.co.uk

[gauss]

Quote:

Originally Posted by Big_Hitter breaking the cap violates one key principle of social insurance programs - the relationship between benefits and earnings

I don't think so. The way the current law is written is that the payout is a function of your lifetime contributions.

If you remove the cap on contributions, then your payout will also increase. It will not be 1:1 of course, but the payout is still tied to the contributions.

-gauss
p.s. I agree with you that it is very important to maintain the relationship between benefits and earnings to sustain the program long term.

[nun]

Quote:

Originally Posted by gauss I don't think so. The way the current law is written is that the payout is a function of your lifetime contributions. If you remove the cap on contributions, then your payout will also increase. It will not be 1:1 of course, but the payout is still tied to the contributions. -gauss p.s. I agree with you that it is very important to maintain the relationship between benefits and earnings to sustain the program long term.

SS is currently progressive so you get proportionally less as a high tax payer than a lower rate tax payer.

You should talk to the UK about maintaining the connection between earnings and benefits because they just remove that from the UK system.

[Big_Hitter]

Quote:

Originally Posted by gauss I don't think so. The way the current law is written is that the payout is a function of your lifetime contributions. If you remove the cap on contributions, then your payout will also increase. It will not be 1:1 of course, but the payout is still tied to the contributions. -gauss p.s. I agree with you that it is very important to maintain the relationship between benefits and earnings to sustain the program long term.

if they continue to base benefits on the uncapped wage base (or some much higher limit) I might be okay with it

[Independent]

Quote:

Originally Posted by gauss I don't think so. The way the current law is written is that the payout is a function of your lifetime contributions. If you remove the cap on contributions, then your payout will also increase. It will not be 1:1 of course, but the payout is still tied to the contributions. -gauss p.s. I agree with you that it is very important to maintain the relationship between benefits and earnings to sustain the program long term.

We're talking about changes to the current law. People have proposed both:

E2.1 Do not provide benefit credit for earnings above the current-law taxable maximum.
and
E2.2 Provide benefit credit for earnings above the current-law taxable maximum.

The SS actuaries have calculated the financial effect of each: Long Range Solvency Provisions

[Big_Hitter]

E2.1 would make SS (more of) a demogrant program, not a social insurance program.

[Independent]

Quote:

Originally Posted by pb4uski I was very surprised that eliminating the cap alone solved 100% of the problem... I suspect because it is really banging those with very high incomes compared to the current approach.

I was surprised, too.

I took this question to another forum where some pension actuaries hang out. The short answer is "The 'Social Security Game' hasn't been updated in years".

Something like "immediately eliminate the taxable income cap" has a bigger impact on the Trust Fund if you do it sooner. Apparently it really was enough at one time, but not any more.

[samclem]

Quote:

Originally Posted by Independent We're talking about changes to the current law. People have proposed both: E2.1 Do not provide benefit credit for earnings above the current-law taxable maximum. and E2.2 Provide benefit credit for earnings above the current-law taxable maximum. The SS actuaries have calculated the financial effect of each: Long Range Solvency Provisions

E2.2 would increase the size of the "trust fund" through 2024, which means (I think) that for the next 9 years the SS program would be self-supporting. After that, the "trust fund" begins a downward trend (i.e. special bonds cashed out over time, money comes from the general fund to pay them), and the "trust fund" reaches zero "balance" at 2060.

Is that a problem? Should the "trust fund" exist forever? IIRC, it was designed as a temporary buffer to hold SS taxes (as special obligation bonds) paid by the bulge of baby boomers and then later pay them out as benefits. I was born on the tail end of the baby boom (early 1960s), and I'll be about 100 years old when the "trust fund" zeros out under proposal E2.2. That (or much sooner) would be a good time to transition SS to a true "pay as you go" system: "Retirees, starting in 2060 your checks will come directly from the contributions of those paying SS taxes. When they make more money, you'll get bigger checks, and when times are rough, we'll all be tightening our belts. But we're done running up bills for people who aren't born yet. People who are born, here, and voting will make the calls and live with the results."

It would be fairly easy to go with option E2.2 but have other aspects of the tax code "claw back" enough of the SS payments to high earners that the actual impact to the budget (not SS in isolation) would look a lot like E2.1. Increase the amount of SS subject to taxation at higher incomes, leave Roth earnings as untaxed ("keeping the promise") but have them increase taxable income dollar-for-dollar for purposes of setting the brackets for income and Cap Gains computations, etc, etc.

Either way, SS will continue to have a terrible "return" for those with high earnings--removing the cap makes it worse than today. It will be highly "progressive" when viewed as ratio of payments to benefits.

[Independent]

Quote:

Originally Posted by samclem E2.2 would increase the size of the "trust fund" through 2024, which means (I think) that for the next 9 years the SS program would be self-supporting. After that, the "trust fund" begins a downward trend (i.e. special bonds cashed out over time, money comes from the general fund to pay them), and the "trust fund" reaches zero "balance" at 2060. Is that a problem? Should the "trust fund" exist forever? IIRC, it was designed as a temporary buffer to hold SS taxes (as special obligation bonds) paid by the bulge of baby boomers and then later pay them out as benefits. I was born on the tail end of the baby boom (early 1960s), and I'll be about 100 years old when the "trust fund" zeros out under proposal E2.2. That (or much sooner) would be a good time to transition SS to a true "pay as you go" system: "Retirees, starting in 2060 your checks will come directly from the contributions of those paying SS taxes. When they make more money, you'll get bigger checks, and when times are rough, we'll all be tightening our belts. But we're done running up bills for people who aren't born yet. People who are born, here, and voting will make the calls and live with the results." It would be fairly easy to go with option E2.2 but have other aspects of the tax code "claw back" enough of the SS payments to high earners that the actual impact to the budget (not SS in isolation) would look a lot like E2.1. Increase the amount of SS subject to taxation at higher incomes, leave Roth earnings as untaxed ("keeping the promise") but have them increase taxable income dollar-for-dollar for purposes of setting the brackets for income and Cap Gains computations, etc, etc. Either way, SS will continue to have a terrible "return" for those with high earnings--removing the cap makes it worse than today. It will be highly "progressive" when viewed as ratio of payments to benefits.

I'm not a big fan of the "trust fund" concept, at least not over long periods of time. The fact is that the gov't does/did not invest trust fund assets in private sector bonds, so the concept just moves gov't expenses to a somewhat different sets of taxpayers.

I'd prefer to say that this proposal provides additional tax revenue equal to about 2.3% of currently taxable payroll. That's enough to close the annual cash flow gap through about 2024. And, it closes about half of the eventual annual gap.

[gcgang]

Vanguard has a site showing how much you need to put up today to get $1,000/month at various future dates.

https://investor.vanguard.com/annuity/fixed


Sent from my iPad using Early Retirement Forum

[nun]

Quote:

Originally Posted by gcgang Vanguard has a site showing how much you need to put up today to get $1,000/month at various future dates. https://investor.vanguard.com/annuity/fixed Sent from my iPad using Early Retirement Forum

The difficulty with this is the effect of inflation. If you are intending to defer for 20 years you'd better inflate the amount you might want in todays dollars to future dollars and buy that much.

The Vanguard number for a 65 year old male is better than that given on https://www.immediateannuities.com/

With Vanguard the 65 year old male gets $1000/month for $167105 and the same amount would get him $919/month according to Immediate Annuities. Still, lets work out what you are buying from Vanguard.

The payout rate is 7.2%, that's the sort of number that looks good to many people, but the actual interest rate if we assume the guy lives to 84 is 3.6% and if you die before age 79 the interest rate is negative. I'm a fan of annuities, but only at the right price and I would not buy an annuity on the open market today....

[Big_Hitter]

Quote:

Originally Posted by nun The payout rate is 7.2%, that's the sort of number that looks good to many people, but the actual interest rate if we assume the guy lives to 84 is 3.6% and if you die before age 79 the interest rate is negative. I'm a fan of annuities, but only at the right price and I would not buy an annuity on the open market today....

IMO, since we don't know when we are going to die, the way to look at this is what interest rate are they using to calculate the annuity amount? I would assume they are using a very updated (and loaded) mortality table.

I bet it is something north of 3.6% for the 65 yr old male immediate.

[gcgang]

Quote:

Originally Posted by nun The difficulty with this is the effect of inflation. If you are intending to defer for 20 years you'd better inflate the amount you might want in todays dollars to future dollars and buy that much. The Vanguard number for a 65 year old male is better than that given on https://www.immediateannuities.com/ With Vanguard the 65 year old male gets $1000/month for $167105 and the same amount would get him $919/month according to Immediate Annuities. Still, lets work out what you are buying from Vanguard. The payout rate is 7.2%, that's the sort of number that looks good to many people, but the actual interest rate if we assume the guy lives to 84 is 3.6% and if you die before age 79 the interest rate is negative. I'm a fan of annuities, but only at the right price and I would not buy an annuity on the open market today....

When you buy a life annuity, the fact that when you "die early" the rate the insurance company pays you is negative doesn't really matter. You're dead.

Inflation is a concern. But converting a portion of other "concernable" investments into an income stream may actually reduce your total concerns.


Sent from my iPhone using Early Retirement Forum

[nun]

Quote:

Originally Posted by gcgang When you buy a life annuity, the fact that when you "die early" the rate the insurance company pays you is negative doesn't really matter. You're dead. Inflation is a concern. But converting a portion of other "concernable" investments into an income stream may actually reduce your total concerns. Sent from my iPhone using Early Retirement Forum

Yes this is a very important point...unless you are concerned about leaving money to heirs. The risk of early death isn't an issue if all you are concerned about is funding your retirement, but it's a difficult thing to ignore for many people as they want to get "value for money". At an implied 3.6% interest rate to age 84 I think it's worth the risk of managing the money yourself.

[nun]

Quote:

Originally Posted by Big_Hitter IMO, since we don't know when we are going to die, the way to look at this is what interest rate are they using to calculate the annuity amount? I would assume they are using a very updated (and loaded) mortality table. I bet it is something north of 3.6% for the 65 yr old male immediate.

The 3.6% pops out of an annuity calculator if you assume a 19 year lifespan past 65.

An SPIA is not longevity insurance as it lacks the deferral component.

[REWahoo]

I have no interest in deferred annuities/longevity insurance, but if I did I think I'd consider buying a SPIA and saving the monthly income payments in the event I lived a long time.

[nun]

Yes longevity insurance is a pure insurance product so I agree that rates of return aren't obviously relevant. But it's interesting to figure out if you could self insure by seeing how much your premium might grow to if you put it in something like a CD ladder. You won't get as much as buying the insurance because of the groups risk aspect, but it's still illuminating to do the calculation. The SPIA is mostly about funding your retirement right now so comparing it to other investment options is a bit more sensible. The SPIA does have an inherent longevity component that you hope to get, but it's not the only thing you are buying. With the SPIA you are mostly spending money to reduce stock market risk.