Law Prof Offers Solution to Annuity Risk: A Federally Issued Alternative
Posted Mar 1, 2011 7:00 AM CDT
By Debra Cassens Weiss
Retirees who want a steady income often buy inflation-adjusted annuities, but they carry a risk because insurers can go out of business and state backstops may provide only modest protection.
Now two professors offer a solution to that potential problem: The federal government could sell its own annuities, products that would carry no more risk of default than Treasury bills. University of Texas law professor Henry Hu and University of California at Berkeley finance professor Terrance Odean outline their proposal in an op-ed for the New York Times.
People could buy the products through their 401(k) plan. Private insurers could still offer their own riskier, higher paying annuities, or they could package the government annuities with their own products.
The professors assert that the new product “wouldn’t cost the government a penny. In fact, the Treasury would benefit. It is only an incremental move beyond issuing inflation-adjusted bonds, which the Treasury already does. By allowing the government to tap a new class of investors, the cost of government borrowing overall would probably drop.”