The Declining Role of Annuities in Retirement Income for Older Americans

Guaranteed lifetime income accounts are increasingly less significant as a retirement income source for older Americans, reports the Brookings Institution. Their study indicates that reliable income sources, including Social Security, defined benefit pensions, and annuities, form a decreasing portion of retiree income. In the early 2000s, such guaranteed income made up over half of the income for individuals aged 65 and older, but this figure dropped to approximately 43% by 2022. Notably, private annuities now contribute minimally, with only about 6% of older Americans receiving income from them.

This trend is driven by factors like strong stock market performance that bolsters defined contribution plans and IRAs, and increased labor force participation among those in their 60s. Nonetheless, as individuals age, reliance on labor income and savings declines, leading to a greater dependence on guaranteed income sources. Brookings highlights significant income reductions with age, noting that total income for those aged 65 to 69 averages around $68,000, which decreases to approximately $43,500 for those 85 and older.

Brookings identifies several barriers to wider annuity adoption, including rational factors such as life expectancy concerns and the need for financial flexibility, as well as behavioral issues like annuity complexity and loss aversion. Adverse selection, or the tendency for individuals with longer life expectancies to purchase annuities, also affects pricing and appeal. Regulations and potential conflicts of interest significantly influence the annuity market, with advisors potentially dissuading annuity purchases due to impacts on fee revenues.

To encourage annuitization, the report suggests policy changes, such as removing additional fiduciary liability for annuities, permitting annuity products as default investment options, enhancing product disclosures, and ensuring clear regulatory guidelines on fees and insurer protections. Concurrently, a bipartisan Senate group proposes initiating Social Security system reforms, while Acting Labor Secretary Keith Sonderling emphasizes expanding access to retirement benefits.