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Article
Removing the Legal Impediments to Offering Lifetime Annuities in Pension Plans
Connecticut Insurance Law Journal (2016)
  • Jonathan B. Forman
Abstract
Longevity risk—the risk of outliving one’s retirement savings—is probably the greatest risk facing current and future retirees in the United States. At present, for example, a 65-year-old man has a 50 percent chance of living to age 82 and a 20 percent chance of living to age 89, and a 65-year-old woman has a 50 percent chance of living to age 85 and a 20 percent chance of living to age 92. The joint life expectancy of a 65-year-old couple is even more remarkable: there is a 50 percent chance that at least one 65-year-old spouse will live to age 88 and a 30 percent chance that at least one will live to 92. In short, many individuals and couples will need to plan for the possibility of retirements that can last for 30 years or more. There were 48.6 million retirees in the United States in 2014, but there are expected to be 66.4 million retirees in 2025 and 82.1 million in 2040.
One of the best ways to protect against longevity risk is by securing a stream of lifetime income with a traditional defined benefit pension plan or a lifetime annuity. Over the years, however, there has been a decided shift away from traditional pensions and towards 401(k) plans and other defined contribution plans that typically distribute benefits in the form of lump sum distributions rather than as lifetime annuities. When given the choice, people rarely choose to receive annuity distributions, nor is it common for people to buy annuities in the retail annuity market. All in all, Americans will have longer and longer retirements, yet fewer and fewer retirees will have secure, lifetime income streams.
This Article considers how changes in the laws and regulations governing pensions and annuities could help promote secure, lifetime income streams. More specifically, this Article explores how the laws governing annuities could be changed to make voluntary annuitization more attractive and how pension laws could be changed to incentivize plan sponsors to offer more lifetime income options and to encourage plan participants to select those options.
After a brief introduction, Part II of this Article provides an overview of Social Security, pensions, annuities, and other lifetime income mechanisms in the United States. Next, Part III focuses on the legal rules that govern annuities and pension distributions, and Part IV discusses the role for pensions, annuities, and other lifetime income mechanisms in providing secure, lifetime income streams. Finally, Part V considers some options for statutory and regulatory changes that would promote greater annuitization of retirement savings.
Keywords
  • annuities,
  • retirement,
  • pension plans,
  • longevity risk
Publication Date
Fall 2016
Citation Information
Jonathan B. Forman. "Removing the Legal Impediments to Offering Lifetime Annuities in Pension Plans" Connecticut Insurance Law Journal Vol. 23 Iss. 1 (2016) p. 31 ISSN: 1081-9436
Available at: http://works.bepress.com/jonathan_forman/249/