the heat of
political infighting over health care reform, at least one piece of
insurance-related legislation appears assured of a comparatively
easy path into law: the Lifetime Income Disclosure Act
(LIDA).
A bipartisan initiative by US
senators Jeff Bingaman and Johnny Isakson, LIDA aims to promote the
use of annuities and other forms of guaranteed lifetime income
products.
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Summing up LIDA, Insured
Retirement Institute (IRI) president and CEO Cathy Weatherford said
it is aimed at helping workers understand their retirement
needs.
It would enable workers to
plan for retirement by providing them with an estimate of how much
they can receive if they choose to put a portion of their defined
contribution pension scheme account balance into an insured
guaranteed lifetime income product.
Under LIDA, private sector
defined contribution schemes will be compelled to disclose detailed
information to participants about their income in
retirement.
Unsurprisingly, LIDA has the
full support of the American Council of Life Insurers.
The act was also endorsed by
Jeffrey Brown, professor of finance at the University of Illinois,
during testimony before a Senate health, education, labour and
pensions committee hearing on American retirement
security.
“The dominant frame in the US
retirement system is an investment, or wealth accumulation, frame,”
Brown told the hearing.
“Individuals have been
conditioned to think of account balances as the appropriate
yardstick for measuring their retirement preparedness.”
As a result, Brown stressed
that Individuals have been conditioned to think of pension scheme
account balances as the appropriate yardstick for measuring their
retirement preparedness.
“In such an investment frame,
life annuities look relatively unattractive,” said
Brown.
“Indeed, they may even look
risky, because the amount of money that one receives depends on how
long one lives.”
He continued: “In contrast,
when viewed through a frame that emphasises the ability to sustain
monthly consumption during retirement, life annuities are quite
attractive because they can guarantee this outcome.
“In short, whereas annuities
look risky in an investment frame, they look like a valuable form
of insurance in a consumption frame.”
Stressing the importance of
the proposed act, the IRI’s Weatherford said a number of recent
studies have highlighted the significance of the LIDA.
For example, a 2009 study by
Brandeis University found that 78% of all senior households are
“financially vulnerable”.
Another study conducted by
profession services firm Ernest & Young in 2009 found that
almost three-out-of-five middle class retirees can expect to
outlive their financial assets if they attempt to maintain their
pre-retirement standard of living.
“The [Ernst & Young]
study determined that many Americans will be forced to reduce their
standard of living, some by as much as 51%, to avoid outliving
their financial assets,” said Weatherford.
She added the study concluded
that households with a guaranteed source of retirement income
outside of Social Security, such as a lifetime annuity, showed the
greatest chance of financial success.
Conversely, the study found households with no guaranteed
retirement income outside of Social Security are most vulnerable to
outliving their financial assets.
