Putting the Pension Back in 401(k) Plans: Optimal versus Default Longevity Income Annuities
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longevity risk; 401(k) plans; retirement
Economics
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Abstract
Most retirees take payouts from their defined contribution pensions as lump sums, but the US Treasury recently moved to encourage firms and individuals to convert some of the $15 trillion in plan balances into longevity income annuities paying lifetime benefits from age 85 onward. We evaluate the welfare implications of this reform using a calibrated lifecycle consumption and portfolio choice model embodying realistic institutional considerations. We show that defaulting a fixed fraction of workers’ 401(k) assets over a dollar threshold is a cost-effective and appealing way to enhance retirement security, enhancing welfare by up to 20% of retiree plan accruals.