I don't complain much or worry a lot. I never look at a glass half empty. However, I'm mad as hell about a U.S. retirement income system (The System) that exists in name only. Presently, about 13 percent (40 million) of U.S. citizens are age 65 or older. In 20 years, some 20 percent (69 million) of U.S. citizens will be age 65 or older. What happens when many run out of money in retirement? The System is letting them down. That's why I'm mad as hell.
Just what is The System that's letting us down? In my view, it's the financial services industry (securities, banking and insurance) and government -- congress and the presidency.
The financial services industry
Imagine that you are a guest speaker on retirement income at a financial meeting where there are executives from securities firms, banks and insurance companies. Your task is to explain what's wrong with retirement savings and suggest solutions, if there are any. Here's what you tell them:
1. Securities firms -- The little guy is being removed from the market. He or she usually buys high, sells low and (to break even) has to earn 100 percent when his or her 401(k) loses 50 percent. What are you doing to make the stock market a reasonable place for smaller investors to stay invested?
Comment -- It looks like leaner and meaner fixed indexed policies -- life insurance, SPDAs and SPIAs (and potentially similar products) -- set the standard here. The insurance and securities industry must seize this opportunity and give savers and seniors guarantees.
It goes beyond the securities industry to its regulators. In early September, the "watchdog" of the SEC announced that the agency consistently manhandled and mismanaged its investigation of Bernard Madoff -- throughout a 16 year period. Plain and simple -- The SEC caught Madoff in lies and misrepresentations, but failed to follow-up and rejected offers from whistleblowers to provide additional evidence.
If the SEC doesn't get itself together, how can it know what's best for fixed indexed annuities? This is an opportunity for the insurance industry to assure regulators, policyholders and prospects that it should oversee its own business practices.
2. Banks -- Those building a retirement kitty don't have reasonable conventional safe savings alternatives -- such as money markets and CDs -- that pay good rates on their money. You give 1 percent or so in interest credits and charge 15 percent on credit cards and personal loans. Who wants to put money in a bank? Again, it looks like indexed products are an answer, at least in the current bond yield curve environment. When will the banks give a reasonable rate to savers?
3. Insurance carriers -- Social Security pays a life-only income in retirement, and everyone likes the deal. Yet, insurers don't sell many SPIAs with life contingencies. Is this because money dries up and marketing departments won't sell new SPDAs? Is it because SPIA beneficiaries will complain if there is no more payout in a life contingent policy? Or, is it because some insurance companies don't want to promise incomes over long periods of time?
Try this marketing message:
It's back to the basics: Like Social Security, we pay income for life -- Webster's traditional definition of "annuity." Even if you are years from retirement, you should purchase your SPDA or single premium deferred immediate annuity (SPDIA) now. You'll get tax advantages and lock-in guaranteed income rates when you need them.
4. Insurance agents -- Once upon a time, it was reprehensible to replace existing annuity and life insurance policies. Now, its normal practice, and it may even be a key part of an agent's marketing plan. The Senate gave a message when IRC, Sec. 1035 came into law -- exchanges are to benefit the policyholder not the insurance company or agent. If congress revisits this law, 1035 exchanges could disappear.
Comment -- It's always a matter of doing what's best for everyone. I'd tell my favorite carrier the following: "Give commissions on death benefits paid as lifelong incomes. Give extra trailer compensation on income streams paid from annuities. Give payout annuities some of the technology that has made SPDAs popular. Then, tighten up on 1035 exchanges. You'll win, we'll win, and most importantly, clients will come out ahead."
Now, let's say you have the opportunity to address congress, or perhaps you are at a tea party or town meeting. You have a few minutes to explain how the government is letting us down. Here are your key points:
There is a hodgepodge of employer sponsored retirement income programs that can be simplified: 403(b)s, 401(k)s, pensions, deferred compensation, 457 plans, IRAs, and so many rules and regulations. Can you simplify things -- perhaps into merely (a) traditional pensions and (b) 401(k)s? Could there be automatic enrollment in 401(k)s and portable accrued benefits for terminating employees? There should be tax incentives for lifelong payments from payout annuities.
Roth conversions --
Not much happens here. The reason is that nobody wants to pile taxable income into a higher tax bracket. Yet, tax-free income in retirement makes sense. Consider a flat tax on the conversion, then extend Roth conversions to all funds in qualified plans -- with a flat or favorable tax rate, as well.
Imagine what would happen if everyone "converted" some 12 trillion taxable dollars in their IRA and pension accounts. The government would have tax money now instead of maybe later. Let me show you how:
Social Security (SS):
SS is broke, but it can't go under -- and it won't. Congress can always increase income taxes to save it. That's a huge burden for our children and grandchildren.
Eliminate your own special "no-contribution" retirement plan, and start paying into Social Security. Then, give SS a softer landing. Get a sharper pencil and raise the retirement age for full benefits, reduce cost of living increases, partner with the financial services industry to give retirement options, and do this now, before it's too late.
For instance, when someone begins a SS retirement income, give retirees private options, an insured low or no load SPIA that includes long term care and survivorship choices. The securities industry can be a part of the process too. Assemble a group of business and government leaders to come up with creative ideas. Do it now and not at an expensive hotel. Let the task force pay its own way.
President Bush introduced Private Savings Accounts, which had to fail. Eight months into office, President Obama wants to address Social Security next year -- maybe! The president can give citizens the truth about Social Security, pension plans and savings for retirement. Know that most of our needs are "sometime" problems. Running out of money is a "full-time," everyday issue -- if that's your situation.
The president (and other elected officials) can educate savers on the perils of poor savings habits. Do that now, before those broke in retirement, and mad as hell, take to the streets. It's a matter of time.
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