Social Security Reform

The private annuities market would likely be able to provide annuities for individual accounts in a reformed Social Security system, but their structuring would significantly affect retirees' income. Requiring workers to buy annuities with their individual account balances would help preserve their retirement income but would also expose them to risks and costs in retirement that they do not currently face. Some options that would mitigate the effects of various costs on annuity payments would require limiting retirees' payout choices. In a reformed Social Security system in which individuals were required to buy annuities, they would need to fully understand the factors affecting their annuity income and its protection. The federal government would need to play some role in ensuring that insurance markets worked efficiently or in providing annuities if the private market failed to do so. To protect annuitants and ensure their equal treatment, the government might have to establish uniform guaranty protections for them and standardized solvency requirements for insurance companies. Policymakers would need to balance the states' longstanding authority to regulate insurance markets with the desire for uniform protections for the annuitants.

GAO noted that: (1) the private annuities market could likely provide annuities from individual accounts without significantly disrupting the market; (2) GAO's work shows that the annuities market has grown over the last 2 decades, with premium payments for annuity purchases increasing from $22.4 billion in 1980 to over $197 billion in 1997; (3) the amount of annuity-related reserves increased about $172 billion to over $1.4 trillion during the same period; (4) while the size of the annuities market would significantly increase as a result of new annuity purchases, these purchases would be phased in over a number of decades, because in the initial years, few workers would have substantial savings in their individual accounts when they retired; (5) this phase-in period would give insurance companies and the annuities market considerable time to adjust to the increasing amount of annuity purchases; (6) however, according to the Society of Actuaries, some insurers may not offer annuities for individual social security accounts because meeting current reserve requirements could strain their financial resources; (7) income from annuities based on individual accounts would depend on account balances, interest rates, current and projected annual mortality rates, and administrative and other costs charged by annuity providers at the time individuals retire; (8) the effects of these factors on annuity income could be mitigated to some extent if all retirees were required to purchase annuities, the types of annuities individuals could purchase were limited, or group annuities were purchased; (9) however, private annuities would not be able to provide certain social security features, such as fully indexed cost of living increases, without reducing initial monthly annuity payments to retirees; (10) privately annuitizing individual accounts could also have important consequences for the existing federal-state structure of insurance regulation; (11) the federal government's role in regulating annuities is currently limited; under a system of individual accounts, this role could significantly expand; (12) states have primary responsibility for regulating the annuities market under their longstanding authority to regulate the insurance industry; and (13) if payouts from individual accounts were to increase the size of the annuities market, policymakers would need to reevaluate the regulatory framework for the insurance industry to ensure uniform protection for retirees' annuity income.