Social Security Reform:

Implications of Private Annuities for Individual Accounts

HEHS-99-160: Published: Jul 30, 1999. Publicly Released: Jul 30, 1999.


Cynthia Maher Fagnoni
(202) 512-7202


Office of Public Affairs
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Pursuant to a congressional request, GAO provided information on the implications of establishing individual social security accounts, focusing on: (1) the effect individual social security accounts might have on the existing annuities market; (2) factors that affect the amount of annuity payments; and (3) the potential role of the federal government in regulating the annuities market if individual accounts were established.

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.

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