Social Security: What Role for Life Annuities in Individual Accounts? Issues, Options, and Tradeoffs

Social Security Brief No. 19 ~ March 2005

Summary: Life annuities are products sold by insurance companies to protect retirees against the risk of outliving their money. A life annuity is a once-in-a-lifetime purchase with lifelong consequences. Requiring retirees to buy life annuities with their individual accounts has advantages and disadvantages. Mandatory annuities cost less on average, while voluntary annuities cost more because shortlived people tend not to buy them. An inherent tension exists between the interests of heirs and the purchase of annuities because money used to buy a life annuity is no longer available to leave to heirs. The timing of annuity purchase can have an important impact on the amount of funds left for a widowed spouse or other heirs. Retirees may want help in understanding the impact of different decisions on their own financial security and that of their spouses, dependents, and other heirs.
This brief draws on analyses and findings in the study panel report, Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy, to highlight key points about the purchase of life annuities at retirement from the perspective of single and married retirees.