February 03, 2005
The Privatization Annuity
According to this article, there's another important distinction about the annuity that a lot of people are missing.
Yes, if you privatize some money, then when you retire, a mandatory annuity would play into it.
However, it looks as if the annuity would not have to be your entire sum of money.
They would take the amount of benefits you'd receive, and they'd look at the national poverty benefit, and figure the difference.
So if your social security payment is less than the amount you'd need to be over the poverty level, you'd have to buy the annuity to make up the difference.
The remainder of your privatized money would presumably be yours, to will to beneficiaries or whatever.
Now, there are things to keep in mind about this:
- There's no guarantee that one's privatized funds would be enough to be able to afford an annuity that would get them to poverty levels. That would mean that poorer people would be forced to annuitize their entire privatized fund, and could still be below poverty level.
- There's no discussion here of the fees that would comprise setting up the annuity. They'd presumably be lower than fees for a normal private annuity, but it would also presumably be less efficient than how social security currently converts your wage-indexed earnings to a guaranteed payment.
- Annuitized payments would in general be far, far less per citizen than they are now. This means more risk for the exposed money that is left over.
- The President is talking about cutting the social security formula so that it grows with inflation rather than with wages. However, the poverty line grows faster than inflation. So that means that over time, the poverty line will get further and further ahead of the benefits supplied by social security. This all means that it becomes more and more likely that the annuity will exhaust someone's private account. In turn, there will be more and more people who cannot reach the poverty line even with the private account fully annuitized.