Group: Annuities Could Provide Key Retirement Savings Aid

October 10, 2006 ( - Giving retirement savers tax incentives to annuitize a portion of their assets held in 401(k)s or IRAs not only helps stretch the money farther but also has benefits for the US economy as a whole.

That was a key argument advanced Tuesday as a Washington, DC-based research group unveiled two economic studies about the effects of using annuities as a retirement savings vehicle.

Not only will increased annuitization help more Americans stretch their assets to last throughout their retirement, but such a trend could also boost Gross Domestic Product (GDP) levels, employment and the S&P 500, according to the American Council for Capital Formation (ACCF).

“Similar to the boost that tax incentive policies have given 401K and IRA plans, offering exemptions on annuity purchases could significantly boost annuitization with a relatively modest revenue cost to the government,” said William Gentry, associate professor of Economics at Williams College, in a statement.

In the first of the two projects, Gentry and Casey Rothschild, assistant professor of Economics at Middlebury College, analyzed the impact of HR 2951 by US Representative Earl Pomeroy (D-North Dakota), which exempts up to $5,000 per individual ($10,000 per couple) (See  Annuity Tax Break Bill Reemerges in New Congress ).

Gentry and Rothschild looked at the annuitization behavior of households with differing levels of retirement preparedness as well as revenue consequences and found that enacting Pomeroy’s bill would:

  • reduce the total cost of providing an annuity by as much as 8%.
  • increase the amount the average retiree household annuitizes by about $50,000
  • reduce federal tax receipts by very modest amounts, around $0.10-$0.15 per dollar of additional annuitization.

In the second analysis, Allen Sinai, chief global economist, global strategist and president of Decision Economics, conducted simulations to identify the sectors of the economy that would have been most impacted by increased annuity purchases if the Pomeroy measure had been law between 1995 and 2005.

He found:

  • an increase in GDP of $34 billion per year
  • lower unemployment by 0.1% per year with up to 200,000 more jobs annually
  • an increase in consumption by $36 billion per year.

“There are positive economic benefits associated with a tax incentive on annuities,” said Sinai, in the statement. “We see increased consumption and better lifestyle in retirement years from a government investment that returns a big bang for the buck.”

“These encouraging results suggest that a change in tax law could address the very serious public policy challenge of retirees outliving their assets,” said ACCF President Mark Bloomfield, in the statement. “Responsible management of payouts is crucial to retirement security and Congress should tackle the much needed policy reforms before it is too late.”

The ACCF is a nonprofit, nonpartisan organization that pushes for tax and environmental policies that encourage saving and investment.