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The History of Annuities in the United States
The History of Annuities in the United
States traces the
development of annuities from Roman times to the present, and
includes information on their regulatory and legislative background.
Professor Poterba's study
includes a comparative analysis of tax-deferred v. taxable investments.
This comparison looks at different lengths of investment (10,
20, 30, and 40 years), different rates of return (3, 5, 7, and
9 percent), and different tax brackets. (28, 39.6, and 20 percent).
Note: 20% represents investment income primarily in the form
of capital gains. (see
table 8). He concludes
that for a person with a long time horizon for savings, tax-deferred vehicles would
realize better returns than taxable investments. If an individual faces lower tax rates
in retirement than while working, the advantage of tax deferral
is even greater.
The History of Annuities
is available on this site through special arrangement with the
Catalyst Institute.
Note: This study is published here online in its entirety,
the report file size is 168k
THE
HISTORY OF
ANNUITIES
IN THE UNITED STATES
RESEARCH CONDUCTED BY:
JAMES M. POTERBA
Massachusetts Institute of
Technology and
National Bureau of
Economic Research
A CATALYST INSTITUTE RESEARCH PROJECT
SEPTEMBER 1997
© 1997 Catalyst Institute and James M. Poterba.
All rights Reserved.
Catalyst Institute 33 North LaSalle
Street, Suite 1920 Chicago, Illinois 60602 USA Telephone/ 312
541 5400 Facsimile/ 312 541 5401
Any opinions expressed are those
of the author and are not necessarily
those of Catalyst Institute.
TABLE OF CONTENTS
SUMMARY
SECTION 1/
INTRODUCTION TO ANNUITIES
SECTION 2/
THE EARLY HISTORY OF ANNUITIES
SECTION 3/
INDIVIDUAL ANNUITIES
SECTION 4/
GROUP ANNUITY PLANS
SECTION 5/
VARIABLE ANNUITIES
SECTION 6/
ANNUITIES IN A COMPETITIVE MARKET
SECTION 7/
CONCLUSION AND FUTURE PROSPECTS
TABLES
REFERENCES
ABOUT THE AUTHOR
ABOUT CATALYST INSTITUTE
SUMMARY
Annuities-individual, group, fixed, and variable-offer valuable
ways for individuals to save and build their savings for retirement.
For many years, annuities have been sold by insurance companies
to people requiring a steady stream of income throughout their
retirement years. As innovations in annuities have occurred,
many policy-related questions have been raised. What are annuities?
Are annuities insurance or securities? How should they be treated
for tax purposes? How prominent a role will they play as Social
Security reform looms closer?
Products similar to annuities have been in existence since early
Roman times and have evolved in financial sophistication as society
has developed. Annuities first appeared in the United States
more than two hundred years ago and have steadily increased in
importance as a retirement income program.
Annuities are a tool primarily for use by people close to retirement
who, in return for payments into the annuity, receive a stream
of income through their natural lives. Annuity providers pool
the mortality risk of similar individuals to achieve a predictable
cash flow.
The annuity business in the United States was a small share of
the overall insurance market until the Great Depression. Financial
panic and bank failures led many investors to seek a reliable
investment vehicle for their savings. A product long in existence,
the individual annuity was such a vehicle. It was offered by
insurance companies whose long and stable financial histories
attracted many investors.
During the 1920s, the group annuity was developed. A typical
group annuity plan required both employer and employee to contribute
to the plan during the employee's active years of work. The goal
of most plans was to provide, in conjunction with individual
benefits from existing pension plans, a retirement income to
replace roughly 40-60 percent of the retiree's earnings from
employment.
Over time both the individual and group
markets have expanded for fixed and variable annuities. Fixed
annuities provide guaranteed periodic payments that do not fluctuate.
Variable annuities address the risk of purchasing-power erosion
that is associated with fixed annuities. Variable annuities provide
payments that depend on the performance of the assets in which
the client's capital is invested.
In recent years, product innovations have expanded the types
of investment options available to variable annuity investors.
The growth of variable annuity premiums during the last decade
has been second only to that of health insurance premiums among
insurance products. The growth in variable annuity and health
insurance premiums has, of course, been due to different factors.
A primary reason for the popularity of annuities is the opportunity
for tax deferred savings. Although annuities are not the only
products offering tax deferral, other products, such as IRAs
and qualified pension plans, have become more restrictive. As
a result of the Tax Reform Act of 1986 which reduced the amount
of tax liability that could be deferred through qualified pension
plans, these plans became less attractive, and annuities more
attractive.
The central trade-offs that investors must evaluate when comparing
annuities with other alternatives are the benefits of the insurance
component, the costs of potential annuity surrender charges,
the potential tax advantages of annuities, the transaction costs,
and, with respect to variable annuities, the investment options
available.
Currently, fixed annuities are regulated as insurance products
and variable annuities are regulated as both insurance products
and as securities products. Insurers supplying variable annuities
are required to maintain separate asset pools as reserves against
those annuities. This prevents poor returns on the variable annuity
portfolio from affecting the capital base of other insurance
company products.
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