How policymakers can restore the role of lifetime income in workplace retirement plans
Executive Summary
The U.S. private retirement savings system is intended to help Americans accumulate financial resources for retirement. Employers are encouraged to offer retirement plans to their workforce, and plans benefit from favorable tax treatment. While the retirement savings system has considerable strengths, changes are needed to close three key gaps:
- the Coverage Gap. Many Americans lack access to a workplace retirement plan.
- the Savings Gap. Even if they have access to a plan at work, many workers are not saving sufficient retirement assets.
- the Guarantee Gap. Americans are spending longer in retirement, but few workplace plans provide resources to guarantee their savings will last for the potential 20 to 30 years of retirement.
Policymakers are implementing new strategies to address the first two gaps. But while experts agree workplace plans that enable Americans to accumulate savings for retirement must also help people manage those savings in retirement, there has yet to emerge a policy consensus on reform to address the guarantee gap.
Fortunately, the marketplace has long offered an insurance product that is well suited to address the guarantee gap: the annuity. An annuity is an investment vehicle that guarantees the payment of a stream of income for either a stated duration (e.g., 20 years) or a lifetime (until death). Among economists, there is consensus that annuities offer exceptional protection against retirees outliving their savings. One analysis of outcomes comparing annuities to retirement financing strategies without an annuity component found that “even when the retirees chose the portfolio that minimized the probability of running out of money while still alive, the retirees still faced nearly a one-in-five chance of failing to sustain this level of income.”1
Unfortunately, three significant policy changes over the past 25 years—one in tax law and two in pension policy—have created substantial disincentives for employers to provide workers the opportunity to invest in options that guarantee income that lasts throughout retirement.
There is an obvious solution to the guarantee gap: In-plan annuities must play a central role in retirement savings plans. While adding financial education, income planning tools and more flexible distribution options are perhaps good first steps toward a more robust retirement savings plan design, that is all they are—first steps.
To download a copy of the full white paper, visit www.tiaa.org/theguaranteegap.
TIAA was founded nearly a century ago to help those who serve others retire with dignity. We stand ready today to work with policymakers to ensure more Americans can access guaranteed income and achieve lifelong financial security.