March 1, 2018

Solving The Annuity Puzzle: Towards Practical Solutions Benefitting All

“Retirees don’t want to think about later life planning. It is daunting, confusing, complex, and expensive. LIFE would offer a simple, understandable, equitable solution. Administered as a national program, it would be widely accessible. It would give retirees freedom of choice, help overcome behavioural biases, and encourage proactive preparation for advanced age……..”.



Why Retirees Need Longevity Insurance

The opening quote comes from a new study titled “Headed for the Poorhouse: How to Ensure Seniors Don’t Run Out of Cash before They Run Out of Time” published by the C. D. Howe Institute. As evidenced by the quote, author Bonnie-Jeanne MacDonald makes a strong case for a national LIFE solution (Living Income for the Elderly) which is simple, understandable, and equitable to all. Why is such an ‘income-for-life’ solution needed? Because research shows that with advancing old age, running out of money becomes the major preoccupation for many middle-income seniors not lucky enough to be members of a DB pension plan. Aside from the stress of worry, a common behavioural consequence is precautionary underspending, even on the necessities of life. 

However, once people reach their 80s and beyond, it is too late to acquire longevity insurance even if it was easily accessible. Further, their ability to make good financial decisions declines with advancing age. MacDonald points to the burden this has historically placed on family members to provide financial and in-kind assistance. However, she argues, just as this ‘advanced aging’ burden is set to grow due to demographics (retirement now spans beyond age 85 for over half of retiring 65-year-olds), the ability of family to carry this burden is declining. Families are smaller, more mobile, and women (the historical care-providers) are more likely to be engaged in the formal workforce. 

This Letter revisits the annuity puzzle, explains why it exists, summarizes MacDonald’s proposal for a solution to the problem, and introduces an interesting ‘Plan B’ alternative solution to it.i



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