better financial security in retirement realizing the promise.pdf

November 2014; revised February 2015 Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities* Katharine G. Abraham, University of Maryland and National Bureau of Economic Research Benjamin H. Harris, The Brookings Institution Abstract The shift in the U.S. retirement system away from company pensions and towards individual retirement accounts has placed greater responsibility on workers for ensuring the adequacy of their saving and managing those savings. Absent ready availability of or familiarity with suitable financial instruments, retirees increasingly are self-insuring against a variety of retirement risks, especially the risk of outliving their assets. One alternative to self-insuring against extended longevity is an insurance product known as a “longevity annuity.” The essence of a longevity annuity is a fixed stream of payments that begins with a substantial delay from the time the contract is purchased—a longevity annuity purchased at age 60 or 65, for example, might begin payments at age 75, 80 or 85. The current market for longevity annuities faces many barriers, ranging from consumer decision making that does not account adequately for longevity risk to the fiduciary concerns of employers to incomplete markets for the hedging of risk by insurance companies. In this paper, we highlight how recent trends have precipitated a need for products that offer protection against longevity risk, consider whether longevity annuities can improve retirement security, highlight barriers to more widespread take-up of longevity annuities, and offer a menu of potential reforms to bolster this fledgling market. I. Introduction longevity risk than other financial products.