STUDY STRESSES ROLE AS SAVINGS VEHICLE: ANNUITY SELLERS IN ASSAULT MODE
Annuity marketers continue to mount a counterattack against federal legislative attempts to curb several favored tax treatments. One…
Annuity marketers continue to mount a counterattack against federal legislative attempts to curb several favored tax treatments.
One of the latest initiatives is a 130-page tome sponsored by the Committee of Annuity Insurers, a coalition of 44 life insurance companies that sell annuities — including Hartford Life Insurance Co., SunAmerica Inc. and American Skandia Life Insurance Corp.
The thrust of the study — “The Economic Role of Annuities,” written by Stanford University economists Michael Boskin, B. Douglas Bernheim and Patrick Baye, and published by the Chicago-based Catalyst Institute — is to convince lawmakers of annuities’ legitimate role as a saving vehicle for U.S. consumers.
The insurance industry clearly has a lot riding on annuities’ maintaining their favored tax status: More than 32 million Americans carry individual annuities and 20 million are covered by group annuities in employer pension plans. Much of that market would disappear if Washington eliminated current provisions that defer taxes on annuity earnings and allow tax-free exchanges between different underlying mutual fund-like investments in annuities.
However, the study also criticizes the current tax system, which Mr. Boskin and his colleagues say favors consumption and borrowing at the expense of saving.
tax spenders, not savers
In their view, overhauling the tax code would help reverse the historical decline in U.S. saving rates, which have fallen to an average of less than 5% in the 1980s and 1990s from more than 9% of gross domestic product in the 1960s and 1970s.
The economists examine three approaches to encourage individuals to increase their savings: broad-based savings incentives (such as replacing the current tax system with consumption taxes), narrowly focused incentives (such as IRAs and tax-deferred annuities), and inducements to expand employer-sponsored pension plans.
While Mr. Boskin and his colleagues support efforts to control the federal deficit, they point out that budget-balancing efforts alone won’t help reverse the savings decline.
For example, they estimate that if the federal government had balanced its books during the early 1990s, and states and municipalities continued to run surpluses, each dollar of public saving would contribute about 30 cents to the national savings rate, taking it up 90 basis points to 4.6% from 3.7%.
“Put into perspective, the federal government could not have realized this objective even if it had eliminated all spending on goods and services,” the economists say. They go on to emphasize: “Balanced budgets are insufficient by themselves to raise capital accumulation to adequate levels.”
what about expenses?
But Mr. Boskin and his colleagues fail to take on two issues that have attracted scrutiny to annuities: a tendency by commission-minded brokers to push customers to shift from an old product to a new one, and the steep expense structure of annuities when compared to mutual funds and other investments.
“Variable annuities are a legitimate option for people who want to invest money for the long term and want to take advantage of tax deferral in their investing plan,” says Patrick Reinkemeyer, publisher of Chicago-based Morningstar Inc.’s Variable Annuity/Life Performance Report.
“Most of the negative publicity toward variable annuities is largely the result of questions (about) whether their high expenses are worth the benefit,” he adds. “If that trade-off was more obvious, maybe a lot of the scrutiny that the industry is coming under would be diminished.”
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