Security Plus Annuities – A Bad Idea

The Aspen Institute recommends establishing “Security Plus Annuities” to supplement Social Security benefits, an idea endorsed by Richard H. Thaler, a University of Chicago economics professor with ties to the financial services industry, in the New York Times (“Getting the Most Out of Social Security,” July 16, 2011).

The idea is that individuals would be able to top off their benefits by purchasing with 401(k) or other funds supplemental annuities from Social Security. 

If the Aspen Institute had stopped there, it would have been a good idea.  Social Security could sell annuities to the public at a much lower price than are the life insurance companies that dominate the commercial market.  Purchasers could be guaranteed the same pay-out rate as the rest of their benefits.

But the Aspen Institute didn’t stop there.  It recommended that “the federal government pre-select a private market annuity provider or providers (depending on the volume of purchases) to underwrite Security Plus Annuities on a group basis.”  The federal government would  provide “record-keeping, marketing, distribution and other administrative services, keeping Security Plus Annuities low-cost and a good value.”  Pay-out rates would vary according to interest rates in the economy as a whole.

In other words, the federal government would provide the work and prestige of Social Security to steer customers to private providers who would reap substantial profits.

Such a plan might have marginal advantages for retirees over the commercial annuities that are available now, but they would be far less than if Social Security issued as well as administered the annuities.  It would be similar to having Medicare collect taxes and then give them to a private medical insurance corporation to provide the insurance.  As with the Security Plus plan, it would add a layer of unnecessary private profiteering that would drive up costs to participants.     

James W. Russell