Payouts In Individual Accounts Pose New Questions

Virginia Reno, National Academy of Social Insurance and TIAA-CREF Institute Fellow

May 2005 |

Key design issues must be addressed if individual accounts are added to Social Security or are created outside of Social Security. Many of the issues in payout policies also have implications for private retirement plans which increasingly are in the form of personal accounts.

Should retirees be required to buy life annuities? The answer will depend on the purpose of the accounts, the size of Social Security benefits that go with the accounts, and whether workers are required to put money in the accounts. If the accounts are meant to provide basic security and other Social Security benefits are not adequate, then policymakers might want to require retirees to buy products that resemble features of Social Security, with payments for life, that are indexed for inflation, and that automatically pay annuities to widowed spouses.

Will joint life annuities be required? With individual accounts, the cost of paying spousal benefits means that payments to a spouse will reduce funds for the accountholder. To require joint life annuities could impose new reporting requirements and dispute resolution procedures beyond those required for Social Security benefits, where providing spousal benefits does not reduce a retiree’s benefit.

Should pre-retirement access to accounts be restricted? The pros and cons of allowing early access to individual accounts will depend, in large part, on the intended use of the accounts, whether people have any choice about whether to participate, and whether the accounts are viewed as personal property. If the accounts are supposed to provide baseline economic security in old age, the case for banning early access is strong. Yet, if the purpose of the system is to expand opportunities for voluntary retirement saving, then early access might encourage people to save more than they otherwise would.

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