FAQS

Answers to FAQs

What’s the difference between the problem Americans for Secure Retirement is raising and the need for all workers to save more for their retirement?
Economists and retirement experts agree that most people do not save enough for their retirement. However, a separate retirement challenge is emerging. As Americans live longer and the shift away from traditional pensions continues, growing numbers of retirees are facing the difficult challenge of managing their savings on their own and managing them so they provide an adequate and steady stream of income for 20 or 30 or more years. Even careful savers will most likely misjudge the effects of inflation, their actual needs, rising health-care costs, how long they will live, interest rates, adequacy of Social Security payments and stock market returns.

What factor in particular makes the problem so urgent now?
There have always been a certain number of individuals who have suffered reduced living standards in retirement. What makes the problem so urgent now is that the size of the retiree population is about to explode. Between now and 2030, the number of Americans 65 and older will more than double, from 35 million to 77 million, as baby boomers retire. Consequently, experts predict that significantly more retirees will suffer reduced living standards than in previous generations, especially given the other factors facing future retirees.

What other factors do baby boomers face that previous generations did not?
Baby boomers will live longer and spend more time in retirement than any other generation in history. Chances are they’ll live longer than they projected when they were planning retirement. In fact, unprecedented numbers will be living into their 90s and past 100.

Significantly more baby boomers will be managing their own retirement savings, as traditional defined benefit plans have given way to 401(k) and other defined contribution plans or no plans at all. As a result, fewer retirees will receive the regular monthly pension checks that many employers once paid. They’ll bear the responsibility for managing their retirement savings so they provide an adequate and steady stream of income for as long as they live.

Finally, baby boom retirees will place enormous demands on an already strained Social Security program – in fact, its trust fund will begin running cash deficits in 2018. Social Security, while remaining very important, will provide less retirement income than many people need. Given the long-term deficit projections, there is even some question as to whether current benefit levels can be maintained.

Why is this an issue that Congress and the Administration should address?
Since the 1930s, the welfare of America’s senior citizens has been a national priority. Seniors who watch their retirement income drop and savings diminish could experience dramatic declines in standard of living. With huge numbers of baby boomers set to retire, the impact could be staggering, as millions of seniors turn to the social services programs of local, state and federal governments for assistance.

However, this crisis is avoidable. There are ways that the federal government can address this problem through incentives that encourage future retirees to create their own safety nets that provide steady “paychecks” for life. Though much is being done to encourage saving for retirement, Congress needs to make it easier for people to manage their savings so they last a lifetime.

What would be the financial impact on local, state and federal social services programs?
An estimate of the financial and operational impact on government programs resulting from this retirement crisis is being developed. However, estimates do exist of future shortfalls in retiree income. In a report titled “Can America Afford Tomorrow’s Retirees?” the Employee Benefit Research Institute concluded that “America’s elderly face an income shortfall between 2020 and 2030 of at least $400 billion – including at least $45 billion in 2030 alone – just in their ability to cover basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider.”

What is the solution?
A steady retirement paycheck for life. Americans for Secure Retirement believes that for most people retirement security requires a regular and steady stream of income throughout their post-employment lifetime. In the past, Social Security and employer pensions provided workers with a steady stream of income. In the future, fewer and fewer workers will receive regular pension checks, and Social Security simply won’t keep pace with inflation, especially health care inflation. One retirement vehicle that provides a steady paycheck for life is a life-contingent annuity.

Aren’t most workers covered by a traditional pension or 401(k) plan?
About 50 percent of full-time workers are covered by employer-sponsored retirement plans. (Businesses are not required to provide pension benefits to their employees.) According to the Economic Policy Institute, “A significant portion of workers who do not receive pension benefits work for small companies or work part time. On average, firms with more than 1,000 workers cover 73 percent of their employees, whereas firms with 10 to 24 employees cover only 25 percent. Just 14 percent of part-time workers are covered.”

Coverage by traditional pension plans is in a rapid decline. According to the Federal Reserve, the share of households covered by a traditional defined benefit plan declined by 22 percent between 1979 and 1998.

Doesn't Social Security guarantee adequate retirement income?
No. While Social Security is an important source of retirement income, it replaces an average of only 41 to 47 percent of a worker's pre-retirement income. For most people, these levels are significantly less than what many experts say is needed for an adequate, let alone comfortable retirement.

What is an annuity?
An annuity is a flexible financial product that allows you to accumulate retirement savings on a tax-deferred basis and then reap the benefits of your savings in the form of a lump sum payment or regular payments for a specified period of time (e.g., for five years, ten years, life).

There are two basic types of annuities – fixed and variable. With a fixed annuity, the premiums you pay earn a fixed rate of return. When you decide to begin receiving payouts, you are guaranteed a fixed income every month (e.g., $1,000 a month for life). With variable annuities, premiums are invested in stocks and bonds selected by the annuity owner, so the earnings may vary. In the case of a variable annuity used to payout retirement income, the dollar amount of the periodic payment varies with the performance of the underlying investments. So the owner’s income can increase, or decrease, over the period of the annuity.

What is the difference between a deferred annuity and an immediate annuity?
The key difference is that a deferred annuity is a long-term vehicle, designed to accumulate assets over time. When you are ready to receive income, usually at retirement, you can convert your accumulated savings into a steady stream of income for the period of time that you choose.

When you purchase an immediate annuity you may specify the period over which you would like to receive an income. Immediate annuities are designed to begin making annuity payments right away or within a short time after purchase; the payments are monthly, quarterly or yearly. In addition, deferred annuities may be purchased with a lump sum or multiple contributions. An immediate annuity is usually purchased with a single lump sum contribution.

What is a life annuity?
A life-contingent annuity provides an individual with guaranteed income payments for his or her life or, in some cases, for his or her life and that of another person such as a spouse. This means that no matter how long an individual lives, annuity payments will continue to be paid. Life annuities are typically purchased with a “guarantee period” of some duration, such as 10 years. This assures that payments will continue for the longer of the individual’s life or the guarantee period.

Life annuities can also be purchased with a “refund” feature. The refund feature provides, for example, that if an individual pays a premium of $10,000 for a life annuity and dies after receiving $4,500 of payments, the beneficiary will receive a refund of $5,500, the difference between the $10,000 premium and the $4,500 received as annuity payments before death.

What makes an annuity “non-qualified”?
“Non-qualified” refers to the fact that the particular annuity is not part of an employee benefit plan that has met certain requirements under the Internal Revenue Code. Not being part of a qualified retirement plan, the annuity is purchased with after-tax dollars.

In greater detail, many employers sponsor some form of retirement plan for their employees, such as a 401(k) plan, a defined benefit plan, or a section 403(b) annuity plan. In the case of these employer-sponsored plans, the monies contributed by the employer and the employee for the employee’s benefit plan are not taxed to the employee, and are often deductible for the employer. These types of plans are typically referred to as “qualified” plans, because their contributions (and other aspects of the plans) “qualify” for special income tax benefits. Annuities used in connection with these employer-sponsored plans are referred to as “qualified” annuities.

The term “non-qualified” annuity is used to describe annuities that are not used in connection with an employer-sponsored plan.

Aren’t annuities only for the rich?
No. Demographic data shows that over three-fifths of non-qualified annuity owners have total household incomes of less than $75,000 per year and nearly two-fifths have less than $50,000 per year (Gallup, 2001 Survey of Owners of Non-qualified Annuity Contracts). The same survey shows considerable diversity among non-qualified annuity owners: 52 percent are male and 48 percent are female; the average age is 65; while 56 percent are retired, 31 percent are employed full time; and although 20 percent did post-graduate work or have a graduate degree, 26 percent did not continue their education beyond high school. Among immediate annuity owners, 64 percent earn less than $50,000, according to Mathew Greenwald & Associates/National Research.