Social Security overhaul holds promise for insurers

The life-insurance industry was set abuzz last week when a senior administration official, speaking anonymously to reporters, indicated that one of the industry’s products would play a central role in the president’s plan to overhaul Social Security.The life-insurance industry was set abuzz last week when a senior administration official, speaking anonymously to reporters, indicated that one of the industry’s products would play a central role in the president’s plan to overhaul Social Security.

Although many details still remain unresolved, the administration’s privatization plan calls for some senior citizens to buy lifetime annuities when they reach retirement age to ensure that they don’t outlive the savings accumulated in their private accounts. The buyer of a lifetime annuity pays a lump sum up front in return for steady payments as long as he or she lives.

The proposal could be a boon to the life-insurance industry, which has long been frustrated with the federal government’s perceived lack of knowledge and appreciation of annuities. It could also provide further grist to opponents of the president’s plan seeking to paint privatization as a bonanza for the financial-services industry.

“Annuities seem to be playing a central role in the Social Security proposal,” said Jack Dolan, spokesman for the American Council of Life Insurers (ACLI). “The administration seems to be getting the message on the importance of annuities and lifetime income.”

But insurers cautioned that many important details about the proposal have yet to emerge. As outlined last week, senior citizens whose traditional Social Security benefits were below the poverty line would be required to use their personal accounts to buy annuities with payments sufficient to life them out of poverty.

“You could have an awful lot of annuities, but I don’t know how big they would be. If you have lots of small annuities, that creates lots of administrative costs and, along with [potential] government limitations on how much insurers can charge, all the gains [to the industry] could be eaten up by administrative costs,” explained ACLI tax and retirement expert Laurie Lewis. She cautioned that it was still unclear who would buy the annuities, who would administer them and who would shoulder the financial risk.

Still, insurers were pleased that annuities are enjoying the spotlight. “It’s a real opportunity for the life-insurance industry to demonstrate their relevancy on one of the toughest policy challenges confronting the nation. The life-insurance challenge is to say you don’t have to reinvent the wheel,” said Tom Crawford, founder of the C2 Group, which represents multiple life-insurance clients.

ACLI has yet to take a position on the president’s overall Social Security plan.
The idea of using annuities in a Social Security overhaul is not new, lobbyists said, but this is the first time that they have figured in a proposal with the political heft now amassing behind the president’s plan.

“It’s a very positive turn of events and new for this administration,” said Mike Kerley, chief lobbyist for the National Association of Insurance and Financial Agents, a trade group for insurance agents, although he said that it was unlikely that such annuities would be sold on the open market, benefiting average insurance agents.

Opponents of the president’s plan said private annuities would reward business interests.

“This would mean not only a windfall for companies that were managing the funds but also mandated annuities being underwritten by insurance companies,” said Roger Hickey, co-director of the liberal Campaign for America’s Future. “For most people, their accounts are going to be tiny and will be eaten up by management fees. When you annuitize it, what you get is very small. Ironically, social security is an annuity itself, so you’re trading a good annuity that works for annuity that going to be insufficient.”

He also noted that the annuity proposal undermined one of the president’s principal selling points: that retirees would be able to pass on their private accounts to their heirs. An entirely annuitized account would offer no survivor benefits.

Life insurers have been working in recent months to raise the profile of annuities. Late last year, they formed Americans for Secure Retirement, a broad coalition of trade groups pressing for more favorable tax treatment of annuities. Rep. Nancy Johnson (R-Conn.) and Sens. Gordon Smith (R-Ore.) and Kent Conrad (D-N.D.) proposed tax bills benefiting annuities last Congress and are expected to reintroduce them next week.

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