One of the many strange aspects of this bizarre election year is that no one is talking about entitlements, often called social insurance.
Four years from now, there will be no choice but to talk about them. In 2020, the big bulge of baby boomers will be turning 65 and putting tremendous stress on government finances. At precisely the same time, the U.S. will be refinancing the 10-year government debt it used to cover the colossal budget deficits created by the Great Recession in 2008 through 2011.
Hillary Clinton has talked vaguely about expanding Social Security by increasing taxes on the wealthy, while Donald Trump has vowed to preserve current benefits by eliminating both the Dodd-Frank and Affordable Care Act regulations, along with the other usual suspects—waste, fraud and abuse. But neither candidate has addressed changes to make the system sustainable in the serious way that both Presidents Obama and Bush at least discussed.
For advisors and their clients, this isn’t a theoretical social policy issue. Many economists expect that near-zero interest rates could remain the norm for the next decade. That’s what the markets are predicting.
In this month’s Big Picture column, Russ Hill of Halbert Hargrove looks in detail at how increased longevity will change business for RIAs. Among other things, he argues that advisors will need to consider fixed annuities as an income solution for older clients who can let mortality credits work to their advantage. Harold Evensky told attendees at our Inside Retirement conference that he believes the DOL rule’s fiduciary standard may ultimately require fee-only advisors to at least discuss these vehicles with clients.
Beyond arguments about compensation, many advisors and clients are averse to annuities because they can lose control over the assets. Others say they are too expensive, but in today’s low-interest-rate world, it is the insurance industry that is worried about their risks and costs. Just look at all the insurers exiting the business.
But I’ve had long discussions with people like Nobel laureate Robert Merton, who serves as Dimensional Fund Advisors’ chief scientist and has researched retirement issues in recent years. He believes that the primary solutions to the global retirement crisis are annuities and reverse mortgages. As someone who has relatives in academia, I’ve seen them retire well, thanks largely to TIAA.
That’s one reason I’ve always considered buying a variable annuity at some point. The main reason is I never worked at a place with a pension.
Today, people are buying equities for income and bonds for risk control and, in some cases, capital appreciation. These conditions are standing the global retirement system on its head.
Evan Simonoff
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