Tuesday, February 22, 2011

Treasury Grab of Retirment Assets: So Far

As far as I can find, there has been no public comment or action from the government regarding this issue since the hearings last September. The IRS, in its December annual statement about planned new regulations, etc., included annuities and pension plans in its list, without any indication as to what it has in mind.

The news reports about the combined Treasury and Labor Departments’ hearings last September do not mention any discussion regarding the fears that I and others have voiced. Our fears is that the Federal government will soon try to take some action that will force Americans to place our retirement savings in U.S. Treasury Bonds. The government need not take our savings, just control where we put it. Putting our savings into Treasuries will reduce our potential retirement income flow, remove more money from the productive economy, and further destroy our freedom of action. If, as I expect, interest rates on Treasuries begins to climb, the size of our investment portfolios will shrink.

There were two sets of themes in the testimony during the hearings. Those who are self-styled experts on retirement focused on what they perceive as the failure of American’s to properly prepare for retirement. They are concerned that people will not make good choices about their savings after retirement and that retirees will run out of money. They regard a guaranteed lifetime income option as vital. I doubt that these people were confronted with the question of forcing the poor, misguided Americans to place their savings in lifetime income vehicles. That is really the question. Somehow, the thinking seems to be, just having the option will be the solution. Later, the experts will discover that the option isn’t being used, at least sufficiently, and the experts will cry that further measures need to be taken to take care of us.

The other theme was the concern of industry representatives, almost entirely members of the insurance industry. Beginning in the mid-90s, critics of the insurance industry, including many regulators, have attacked the industry for putting annuities within pension plans and IRAs. In the critics’ view, pension plans and IRA’s provide tax deferral, which annuities also provide. The criticism was that there were cheaper investment vehicles than annuities to put into a 401(k) or Simple Plan. Critics, such as Susie Orman and the industry regulators, claimed that the only reason annuities were sold were much higher commissions and profits. These complaints ignored the actual commission rates of the majority of mainstream insurance companies (as well as other issues). These critics also tended to ignore features of annuities that weren’t provided by other investment vehicles, such as the lifetime-income feature and the insurance element.

The comments of the insurance representatives at the Treasury and Labor Departments’ hearings was that these criticisms had to be addressed. Their companies would not participate if they were exposing themselves to legal harassment, even if the harassment was ultimately baseless. I expect that the criticisms of annuities by regulators is the primary reason why annuities aren’t available in 401(k) plans now. It is also possible that the government will use the intent of private insurance companies to profit from their business as a justification for creating a government annuity, thus fulfilling the fear that all of this is just a ploy to force retirement plan money into funding the U.S. government.

I saw no mention of any consideration of what kind of annuity that should be offered, e.g., fixed (like a bank CD) or variable (which allows investments in stocks and bonds with in the annuity). If the intent is to put more money into Treasury Bonds, variable annuities would not be allowed. Nor did I see any mention of the interest rates that would be paid on a fixed annuity. With the Federal Reserve Board forcing interest rates to be very low for long periods of time, the income available to an annuity holder would be very small. For someone who lived a long time, an income resulting from a low interest rate would suffer financially, especially if there were any level of inflation, even 1%. Fixed annuities only make sense in a gold standard, where even a low rate of interest would provide a growing standard of living.

We are now left waiting for Treasury and the Labor Departments to take the next step, if any. It may be that the next step would be to propose a law for Congress to consider. It is another shoe that we are waiting to hear from.


  1. With this crazy economy people say that a fixed annuity is still the safe way to go.

  2. I wonder who Mike is. It seems that he has something to do with the insurance industry. Now, I'm not saying that is a bad thing in that I was connected with the insurance industry for about 20 years. But, and that is meant as a big "but", I never recommended and would not recommend a fixed annuity in the US economy as it presently exists. Why? Because a fixed annuity, after taxes (when it is redeemed or paid out) and inflation is a guaranteed loss. There is practically no result, when there is price inflatiom and taxes, for a fixed annuity to have a positive return. Sorry.