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Oral Testimony of Teresa Ghilarducci No Better Annuity Deal than Social Security: How to Help Employers Help Workers to Use Defined Contribution Balances to Delay Claiming2018 ADVISORY COUNCIL ON EMPLOYEE WELFARE AND PENSION BENEFIT PLANS LIFETIME INCOME SOLUTIONS AS A QUALIFIED DEFAULT INVESTMENT ALTERNATIVE (QDIA) –FOCUS ON DECUMULATION AND ROLLOVERSJune 19, 2018 9:00 am C5521 Room 4, U.S. Department of LaborMy name is Teresa Ghilarducci and I thank you for inviting me to testify as you provide advice to the DOL for their guidance on how certain annuities could be a QDIA. I am a Professor of Economics, The New School for Social Research and former member of Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings and direct our economic policy center, Center for Economic Policy Analysis. I want to thank Michael Papadopoulos for his research assistance on the numbers of older workers and how much IRA and 401(k) balances they have and Tony Webb the research economist at my lab at the New School. I want to share six key points in my written testimony. Private and Voluntary Annuity Markets are Fundamentally Flawed Experts conclude retirees need annuities to avoid anxiety and hardship; and people want secure lifetime income, but near retirees don’t buy annuities creating a market failure in annuity provision;Annuity markets fail because annuities are private insurance products which suffer from lack of pooling, adverse selection, and the profit requirement, all which makes annuities too costly. That the demand for annuities is not met by market supply constitutes a classic market failure that got worse when employer-based pensions morphed from annuity provision through DB to lump sums in DC plans and the DC cousin, IRAs (most IRA money is from 401(k) plans. US Lack the Essential Elements of a Good Pension System I am afraid the DOL efforts to adopt regs aimed to tweak and nudge the voluntary, individual-directed, commercial-based DC system to be a good pension system– a good pension system is one that does what a three words acronym describes: “AID:” accumulate, invest, de-accumulate appropriately – probably won’t be enough to “move the needle,” or make a difference in the risk of inadequate retirement income. Providing Annuities Will Barely “Move the Needle”The issue of annuities in DC plans concerns about 20 percent of 28 million near retirees who are the most affluent and 25 percent of all retirement assets. Even if all sponsors offered annuities, the effect probably won’t “move the needle” for the majority of the 39 million people (28 million are workers) aged 55-64 because they don’t have a DC or IRA plan or their assets are under $100,000; About 27% of all retirement assets is practically annuitizable and the DOL wants to help make that share larger. Of the $27 trillion in retirement assets (DB,DC, IRA) only 27% -- half of DB benefits -- are annuitized: $7.7 trillion in DC plans and $8.6 trillion in IRAs do not have practical ways to annuitized. Annuity products in DC plans would affect about 25% of retirement assets -- the $7.7 trillion in DC plans, not IRAs. Annuity products in DC plans would affect about 25% of the most affluent older workers. One of the best and easiest way to get a higher annuity is from Social Security concluded Bipartisan Policy Center Commission on Retirement Security and Personal Savings. Most older workers– about 28 million in 2018 -- would be helped more by devising their own “temporary annuity” with their DC and IRA account in order to wait to claim Social Security at a later age.Every year you wait you will increase the size of your Social Security annuity by an average of 7.41% for every year you wait to claim between the ages of 62 and 70. (The retirement benefit boost one gets from delaying from 62 to normal retirement age, say 67, is lower than the delayed retirement credit from 67 to 70, which is the more familiar 8% per year delayed retirement credit people refer to).Since most individuals need a larger annuity to cover basic living expenses than what their Social Security collected at or below full retirement age will be, supplementing the annuity is attractive and I applaud DOL to try and help employers and employee pay out the 401(K) in an annuity. But balancing the need for choice and regulating the private products may produce unacceptable risk since the products are often not understood or advised by experts.Plan sponsors are unlikely to offer annuities because the cost and complexity likely can’t meet ERISA reasonable protective standards;Bottom Line: We need to help employers offer advice about how to create temporary annuities that bridges the gap between work and claiming. Tony Webb and I volunteer to help you construct language that instructs employers how to educate their workers about how spending down a $150,000 lump to delay collecting Social Security for 6-7 years would benefit their financial future. The DOL should provide safe harbor education tools for employers. Technical Notes ?Size of IRA/401(k) and equivalent accountsEmployed ages 55-64TotalNo Savings$1-$100,000$100,000-$1,000,000>$1,000,000Number24,448,0009,300,0007,700,0007,300,000148,000Share100%38%31%30%1%Total savings $2,546,000,000,000 $0 $253,000,000,000 $2,109,000,000,000 $184,000,000,000 Average income $55,102 $32,500 $47,700 $88,400 $218,000 Average balance $104,139 $0 $32,857 $288,904 $1,243,243 ??????All people ages 55-64TotalNo Savings$1-$100,000$100,000-$1,000,000>$1,000,000Number36,966,00017,300,00010,300,0009,200,000166,000Share100%47%28%25%0%Total savings $2,884,000,000,000 $0 $312,000,000,000 $2,368,000,000,000 $204,000,000,000 Average income $36,442 $17,471 $35,659 $70,143 $194,361 Average balance $78,018 $0 $30,291 $257,391 $1,228,916 ??????Source: Survey of Income and Program Participation Wave 1 ................
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