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There are hidden dangers in limiting the choice at retirement only to annuities. International research has shown that compulsory annuitisation has severe drawbacks and can end up being a regressive measure for societies.
How so? It's well known that people with high incomes live longer. Annuities work by sharing mortality risks across the group by paying people in that pool until they die. Those who live longer benefit from a portion of the payments of those who die sooner. In effect, were all South Africans to be in such a pool there would be a shift of wealth from the poor to the richer people, who by living longer benefit from those annuities for longer.
This effect of mandatory annuitisation was documented by Jeffrey Brown, of the Centre for Retirement Research at Boston College, who stated: "These implicit financial transfers are often away from economically disadvantaged groups and towards groups that are better off financially."
Compulsory annuitisation would therefore be a case of Robin Hood reversed. The State would be ensuring the rich would be profiting from the poor - certainly a dire unintended outcome. The goals of the State would be better met by ensuring that a minimum level of income (with inflation increases) is annuitised, with the balance once that's met remaining flexible.
By requiring that investors meet a minimum level of income Government would have the assurance that retired people won't turn to them for social security when their lump sum assets are exhausted. By allowing more flexibility for those with assets over and above that income level wealth transfers from the poor to the wealthy will be minimised.
The flexibility would also allow investors to choose annuities, including more flexible living annuities, or investing in fund investments or even in a post-retirement business.
Another danger is that limiting choices will make investing for retirement un-attractive. People may choose to save in other ways - although we know that too often that never happens or those retirement savings are raided.
Compulsory annuitisation also bucks two major international trends: increased freedom of choice in investing and improving longevity trends. We live in a world where people want more choice.
Improving longevity is seeing a massive shift in the number of people living to advanced ages. To put that in context, the number of people in Britain living to 100 and beyond was 6 000 in 2000. However, 60 years from now the number of centenarians is expected to be a staggering 95 000. Those in good health retiring at 55 may want to place a portion of their retirement assets into growth investments to take care of them in much later years. A rigid approach at retirement doesn't address these improving mortality trends and risks offering poor values.
The road to good intention is often littered with the potholes of unintended consequences.
Retirement reform needs to look to improve the lot of all South Africans and should encourage savings. Flexibility for those retiring is needed for them to meet the needs over improving lifetimes. We encourage those in the reform process to keep that in mind and ensure fairness and equality.
