Symetra names vice president of Capital Markets Pricing

 Symetra Life Insurance Company has appointed Brent Martonik to the newly created role of vice president and director of Capital Markets Pricing in the company’s Retirement Division, reporting to Dan Guilbert, executive vice president of the division.  

Martonik will develop investment and hedging strategies in support of new and existing annuity products. He also will have asset-liability management responsibility for the Bellevue, Washington-based insurer’s retirement product portfolio, which includes deferred and income annuities.   

Martonik joins Symetra from Surema, Inc., a Seattle-based risk management consulting firm he co-founded in 2004. At Surema, he was responsible for business development, general management and execution. That included assessing the market exposure of clients’ product offerings, creating product pricing and hedge management solutions, and developing policies and procedures for derivative operations.

Before Surema, Martonik spent 18 years at Safeco Corporation. From 1999-2004, he was vice president and senior derivative portfolio manager, responsible for trading equity and interest rate derivatives. He previously served as assistant actuary at Safeco Life Insurance Company, directing asset-liability management and new product pricing.

Martonik earned a bachelor of science degree in mathematics from the University of Washington. He is a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries.

LPL names David Reich to lead retirement platform development

LPL Financial has appointed David Reich executive vice president of retirement platform development. He succeeds Bob Francis, who was executive vice president, retirement strategy, before leaving the company last January.

Reich will continue to expand the firm’s retirement platform, introducing new services and technology and furthering the integration of technology platforms used by LPL Financial advisors to support their retirement plan business.

Along with Bill Chetney, executive vice president of LPL Financial Retirement Partners, Reich will report to Derek Bruton, managing director and national sales manager, Independent Advisor Services.

Reich most recently served at Ameriprise Financial as vice president and general manager, retirement strategies and solutions.  He was responsible for strategic development and marketing of all retirement products and platforms to financial advisors.  Prior to that, he served in a number of senior leadership roles across Ameriprise and American Express, its former parent.

Lincoln Financial launches “InStep” participant-ed program  

Lincoln Financial Group has introduced the Lincoln InStep participant education program, which includes content, products, services and multimedia that can help employees take key steps in the savings process.

Four steps in the program include:

• Getting Started – Learn the basics of retirement planning and investing through information designed to help people saving for retirement.
• Saving More – Identify new ways to boost retirement savings by helping people understand the small steps they can take to help them make the most of their retirement plan and achieve their retirement goals.
• Investing Wisely – Optimize asset allocation to fit individual risk profiles and the market environment.
• Stepping Into Retirement – Explore retirement strategies and income options.

The four steps are intended to help participants manage retirement planning and financial needs through such life phases as career moves, marriage, parenthood, and home ownership, among others. The program includes in-person online and/or print resources.

Prudential launches new ad campaign: “Bring Your Challenges”

Prudential’s latest U.S. advertising campaign, launched May 24, “invites individuals, financial professionals and institutions to bring their biggest financial challenges to Prudential and highlights the company’s 135-year history of meeting those challenges for Americans,” the company said in a release.

The campaign opens with ads The New York Times, The Wall Street Journal, Washington Post, USA Today, The Star-Ledger, Barron’s and the Financial Times, and will include television, outdoor advertising, digital, business, general interest and trade media.

In short videos featured on a website created for the campaign, Prudential executives and industry experts discuss common financial challenges, including achieving lifetime income security, managing risk in pension plans and investments, delivering cost effective benefits to employees and providing adequate insurance coverage.  

A new report from Financial Engines, which manages money for and gives automated advice to millions of plan participants, asserts that many Americans are fearful about their financial future.

The report, “Understanding the Accidental Investor: Baby Boomers on Retirement,” which was based on 300 interviews and surveys that Financial Engines conducted between 2008 and 2011, says that:

• More than half of participants interviewed expressed uncertainty about the future;
• Nearly half had a fear of poverty in retirement;
• Nearly half distrusted the motives or qualifications of financial services and insurance firms; and
• More than a third of near-retirees and retirees did not feel confident or knowledgeable making important financial decisions.

These emotions prevented many participants from accessing professional advice, the paper said, or made them avoid thinking about retirement altogether. Participants who feared poverty also engaged in “magical thinking” – telling themselves that everything would work out in the end. Those who were distrustful of professionals or unconfident about finances frequently turned to family and friends for advice. 

Financial Engines identified five common needs that, if met, could potentially help participants overcome these strong emotional barriers. Those needs include:

• Flexibility. Participants want flexibility and control over their retirement investments. They do not want to be locked into an investment vehicle—especially early in retirement when uncertainties are at their highest.

• Safety. Fearing significant losses right before or in retirement, many participants want low-risk investments or investments that could provide a reliable income over time, and potentially for life. Many desired both—plus flexibility.  

• Help from an Advisor. Many participants said they want a trusted advisor, but don’t know whom to trust with their money.   

• Sponsor Evaluation. Participants said that having their employer select and monitor independent retirement income providers made them more likely to accept professional retirement help.

• Fee Transparency. Many participants demanded clear and easily understood fees. They said that they would not act unless they fully understood the fees associated with a given product or service.

The “Understanding the Accidental Investor: Baby Boomers on Retirement” white paper can be downloaded at www.financialengines.com.   

About one fourth of Americans age 18 and older said they could “certainly not” and another fourth could “probably not” come up with $2,000 in cash within 30 days from any source, according to an analysis of 2009 survey data by a team of business and sociology professors.      

The findings, an indication of the level of household savings in the U.S., were published by the National Bureau of Economic Research in a paper entitled, “Financially Fragile Households: Evidence and Implications,” by Anna Maria Lusardi of George Washington University, Peter Tufano of Harvard, and Daniel J. Schneider of Princeton.

Generally, low levels of ability to access $2,000 on short notice correlated with low income, low wealth levels, low education levels and losses in the financial crisis. But the researchers were also surprised to see so many high-income households without $2,000 readily at hand.

“It seems somewhat unbelievable that nearly a quarter of households making between $100,000 and $150,000 claim not to be able to raise $2,000 in a month, but this fact may be less shocking when one considers costs of living in urban areas, costs of housing and childcare, substantial debt service, and other factor,” the authors wrote.

“A material fraction of seemingly “middle class” Americans also judge themselves to be financially fragile, reflecting either a substantially weaker financial position than one would expect, or a very high level of anxiety or pessimism,” the paper also said.

To get $2,000 in an emergency, 52.4% of those surveyed (excluding those who were certain they couldn’t find the money at all) would draw from savings, 29.6% would turn to family members, 22.9% would work more, 20.9% would use credit cards and 18.8% would sell possessions, to list the most common resources.

Comparing developed Western nations, the researchers found that ability to “certainly” come up with the equivalent of $2,000 varied from 57.7% in the Netherlands, to 48.2% in Italy, 44.3% in Canada, 36.2% in France, 31% in Portugal, 30.7% in Germany, 24.9% in the U.S. and 24.1% in the United Kingdom.

© 2011 RIJ Publishing LLC. All rights reserved.

LIMRA has reported that the percentage of U.S. individual variable annuity (VA) buyers who purchased any guaranteed living benefit (GLB) feature fell slightly in the first quarter of 2011, to 86% from 87% in the first quarter of 2010, National Underwriter reported. It was the lowest GLB election rate since 3Q 2008.

GLB features include guaranteed living withdrawal benefits (GLWB), guaranteed minimum income benefits (GMIB), guaranteed minimum accumulation benefits (GMAB), guaranteed minimum withdrawal benefits (GMWB), and hybrid benefit guarantee features.

Insurers generated about $29 billion in VA sales during the latest quarter, and about $23 billion of those sales came with GLB elections, LIMRA analysts said.

For 8% of the sales, a GLB feature was available but not taken; for 13% of the sales, no GLB feature was available.

GMABs sold best in the career agent channel, while hybrid guarantees sold best in the bank channel.

VA assets backed by guarantees reached $558 billion at the end of the first quarter, up 7% since the end of 2010.

Auto-enrollment increases overall participation in employer-sponsored retirement plans, but auto-enrolled workers don’t contribute as much, on average, as active enrollees, mainly because employer set default contribution rates conservatively.

That was one finding of an analysis by Aon Hewitt, the human resources and consulting firm, of the saving and investing habits of three million participants in 120 large employer-sponsored defined contribution retirement plans.

Participants who were subject to automatic enrollment contributed one percentage point less on average (6.8%, compared to 7.8%) than their actively enrolled counterparts. More than three quarters of plans (76%) set default contribution rates at only 4% or less.

In addition, 41% of participants who were automatically enrolled are not saving enough to receive the full match from their employers, compared to only 25% of participants who proactively enrolled.  

The study showed record levels of participation, with 75.8% of eligible employees participated in their company’s defined contribution plan in 2010, up from 73.7% percent in 2009 and 67.2% in 2005.

Before-tax contributions to DC plans were unchanged from 2009, Aon Hewitt found. But, at 7.3% of pay, they still lag pre-recession levels (7.7% in 2007). 

Automatic enrollment is believed to be the reason for the increase in participation levels. Three in five employers (60%) auto-enrolled employees into their DC plans in 2010, up from 24% in 2006. But 85% of those who use auto-enrollment only apply it to new hires, so the participation levels are rising gradually. Where employees were subject to auto-enrollment, 85.3% percent participated in their DC plan, 18 percentage points higher than in plans where employees were not.

Many employees are clearly not using the plan to build sufficient retirement savings. Cumulatively, workers are saving over 10% of pay (including almost 4% in employer contributions. But almost 30% of participants don’t contribute enough to receive the employer match, half of all account balances are under $25,000 and, over the past three years, median annualized returns have been just 1.7%. More than one in four participants had a loan outstanding against their accounts at the end of 2010.

Most employees were not actively involved in managing their accounts. Despite strong market returns in 2009, only 14.2% of employees made any sort of fund transfer in 2010, down from 16.2% in 2009.

Those figures pertain to participants; they do not include the non-participants or the 50% of U.S. workers with no access to a workplace plan.

The study did not mention the possible impact of investment fees on employee accumulation levels, or whether plans with lower fees had higher participation rates or higher account balances. Fees and plan fee transparency are the subjects of ongoing Department of Labor rule-making efforts. The study didn’t assess the potential impact of rising health care costs or slow compensation growth on participants’ abilities to contribute to their plans.

Aon Hewitt analysts suggested that, to boost participation and contribution rates, companies combine automatic enrollment with automatic contribution escalation and target-date portfolios, and that they periodically auto-enroll non-participating employees, not just new hires. 

© 2011 RIJ Publishing LLC. All rights reserved.

To sell a lot of variable annuities, an insurance company and its wholesalers need a compelling story that’s grounded in product innovation and supported by consistent marketing and/or advertising.

Prudential Financial, for instance, has built a juggernaut of a story around its Highest Daily step-up feature. Jackson National Life’s Perspective VA topped the VA charts by promising advisors unrestricted investing with a guarantee.

Jackson National Life’s only blunder this month was that it didn’t take better care of its story.  Two weeks ago, when Tidjane Thiam, the CEO of JNL’s UK-based parent Prudential plc (no relation to Prudential Financial) told analysts that he envisioned unspecified risk reductions in the VA by end of year, he probably didn’t realize that his statement would cross into the broker-dealer media and create uncertainty. But it did. And it muddied the Jackson story. 

Now the Jackson National wholesalers are scrambling to sooth their key distributors, as they should. And if they can reassure advisors that the “no investment restrictions” story remains intact, this month’s communications malfunction shouldn’t do much lasting harm. 

Why not? Because many advisors thought the changes described by Thiam, the first African CEO of a FTSE 100 corporation, were already long overdue. “Jackson National was getting to the point where over 65% of its revenue was coming from variable annuity sales,” said one advisor who has sold a lot of variable annuities over the years.

“That’s too large a percentage of their overall book. Insurance companies make their money by taking lots of little risks, not a few big ones. What they’re doing is very smart.”

Jackson National’s product, he added, also has plenty of leeway to become more conservative. That’s because so few competitors—stocks, bonds, or other variable annuities—have a better story to tell.  

“There used to be 100 girls at the dance,” the advisor said (without pausing or bothering to beg pardon for employing such a sexist metaphor). He meant that prior to the financial crisis, during the VA arms race, an advisor could choose from a relative cornucopia of eligible and attractive variable annuity contracts. Then the financial crisis produced the Great Shakeout. 

“Now that there are only three girls left at the dance,”—meaning Prudential, Jackson National and MetLife—“and everybody wants to dance with them, they don’t have to be as pretty. They will be dialing back to something that’s still competitive and still really good,” he said.

“The word I got from Jackson National is that there won’t be any investment restriction-based changes. There may be changes to the richness of the minimum growth [the rollup options], and the withdrawal rates [the age-dependent payout percentages] might be modified. But they’ve been so far ahead of everybody else that they will still be very attractive even with the modifications. They’re too rich.”

“Right now they have a quarterly reset ratchet and seven percent accruals, at a time when others have a five percent accrual with annual resets. Even if they dial  their offering down to a quarterly reset at five percent or an annual reset at six percent, they’ll still be very competitive. They should take advantage of their pricing power. When you’re an Apple iPod and everybody wants you, you can do that.

“In 2007, there were a lot of VA products that were ‘Swiss Army knives.’ They had few investment restrictions, lots of combinations of benefits that addressed multiple needs. Since then we’ve been seeing manufacturers try to find niches where they’re most comfortable. One will have the most competitive death benefit. Another will have the best deal for a joint and survivor. We’re seeing products that are more specific-use focused,” he said.

Jackson National had one of the last of the rich contracts. “They straddled the line really well. They had a great sport SUV, and now we’ll see whether they decide to be more sport or more SUV,” he noted. ” [The anticipated changes] will absolutely take away from their sales. But that’s a good thing. They don’t want the level of volume they’ve seen. If they continue to get strong demand, it will be a more profitable business, because their hedging costs will be lower. Or their flows will slow and it will be a safer business.

“But I don’t know how anyone could have been surprised at this. It’s making so much news now because the other companies gutted their products back in 2009. Now, even though Jackson is dialing back, it may still be the prettiest girl at the dance.”

Ultimately, he said, the choice of variable annuity depends on what the advisor and the client are trying to accomplish. For somebody who wants maximum equity exposure with a safety net, the Jackson National Perspective will still fill the bill. For somebody who’s looking more for guaranteed income than for performance, another product might be better. And that’s fine.

In variable annuity sales, as in any type of selling, the story is paramount. You can tinker with the numbers and survive. But you should never tamper with the story.   

© 2011 RIJ Publishing LLC. All rights reserved.

New York Life’s first quarter SPIA sales up 45%

New York Life reported first-quarter gains in sales of life insurance, income annuities, long-term care insurance and mutual funds, and double-digit increase in the number of new agents hired in the first three months of 2011.

Individual life insurance sales increased 24% through March, while applications for life insurance are up 12.7%, compared with the first quarter of 2010. Life insurance sales by the company’s 11,900 agents were up 29%, the best three-month start to a year on record.

Sales of long-term care insurance have also increased by a robust 16% for the first quarter this year, following a strong 12% gain in 2010.

New York Life remains the leader in sales of fixed immediate annuities, with more than 25% of the market, according to an industry source. The company’s sales of these guaranteed lifetime income products rose 45% in the first quarter, with gains in sales through agents and sales through third-party distribution partners.  

Sales of New York Life’s mutual funds (including the company’s MainStay family of funds) increased by 77% year over year in the first quarter.

Chris Blunt, executive vice president in charge of Retirement Income Security, attributes the sales gains in large part to the funds’ performance. “In all our distribution channels, customers have come to recognize the strong line-up of funds managed by our investment management subsidiary,” he said.

F-Squared Investments names Bill Carey President of Retirement Solutions   

F-Squared Investments announced the appointment of Bill Carey to head its newly formed retirement division. Carey joined the company May 16, and will be responsible for F-Squared’s customized, private labeled target-date strategies and funds, as well as Collective Trust Funds and other investment solutions.

Carey has been president of Fidelity Investments’ 401(k) business and Bank of America’s Head of Institutional Retirement.

F-Squared intends to partner with financial services firms that have a product and distribution commitment to the retirement market, and then develop customized, private labeled Target Date offerings that combine F-Squared’s AlphaSector risk management capabilities with the investments of the partner firm. 

“While Target Date funds are here to stay, the failure to meet client expectations of asset protection in 2008 exposed some flaws with so-called ‘first generation’ Target Date funds,” Carey said in a release. “The next generation solution needs to be able to protect client assets during severe market downturns.”  

Sixty percent of middle-income Boomers expect to delay retirement five years

A majority (73%) of middle-income Baby Boomers in the U.S. are rethinking their retirement timing due to the recent economic crisis and of those, 79% are delaying retirement by an average of five years, according to a study by Bankers Life and Casualty Company Center for a Secure Retirement.

The study, Middle-Income Boomers, Financial Security and the New Retirement, which focused on 500 middle-income Americans between ages 47 and 65 with income between $25,000 and $75,000, found that one in seven believe that they will “never be able to retire” due to the turbulent economy.

According to the study, 71% worry about outliving their money, 68% have seen a decline in their retirement account balances since 2008 and 55% have saved less than $100,000. Three out of four expect to work in retirement and 57% say that they will have to work for financial reasons.

Two-thirds (64%) of survey participants are concerned about being forced to retire, most commonly due to loss of employment (44%) or failing health or disability (40%).

AnnuitySpecs.com releases 1Q 2011 FIA sales  

Forty indexed annuity carriers participated in the 55^th edition of AnnuitySpecs.com’s Indexed Sales & Market Report, representing over 99% of indexed annuity production. Total first quarter sales were $7.1 billion, up nearly 5% from the same period last year. As compared to the previous quarter, sales were down nearly 15%.

Allianz Life maintained its lead position with a 21% market share. American Equity kept their position as second-ranked company in the market, while Aviva, North American Company and ING rounded-out the top five, respectively. Allianz Life’s MasterDex X was the top-selling indexed annuity for the eighth consecutive quarter.

For indexed life sales, 39 insurance carriers in the market participated in the AnnuitySpecs.com’s Indexed Sales & Market Report, representing over 99% of production. First quarter sales were $203.0 million, an increase of nearly 42% over the same period in 2010. As compared to the previous quarter, sales were down over 8%.   

Pacific Life remained the market leader with a 14% share, followed by Aviva Minnesota Life, National Life Group, and AXA Equitable. Minnesota Life’s Eclipse Indexed Life took the position as the top-selling indexed life product for the first time.

NPH announces record quarterly revenue, sales

During the first three months of 2011, independent broker-dealer network National Planning Holdings, Inc., set record quarterly revenue of more than $198 million on record quarterly gross product sales of nearly $4.3 billion. The company is an affiliate of Jackson National Life.

Revenue and sales increased more than 19% and 21%, respectively, compared to the same period last year. NPH also added 93 representatives in the first quarter of 2011, bringing the network’s total representative count to 3,563, up nearly 3% from a year ago.

In 2010, NPH introduced the WealthOne advisory platform, which helps advisers adopt a fee-based compensation model using funds from Vanguard, JP Morgan, UBS, Standard & Poor’s, Russell Investments, Lazard, Avatar Associates, Loring Ward and Curian Capital LLC.

WealthOne also features NPH’s Advisory Portal, which enables advisers to access the platform directly from their broker-dealer’s website.

A survey by Fidelity Investments, the largest provider of IRAs and workplace retirement savings plans, has found that 30% of its plan participants who made a job transition are unsure of what to do with their savings.

In a separate announcement, the Boston-based firm reported that the average 401(k) balance rose to $74,900 at the end of the first quarter, marking an all-time high since Fidelity began tracking account balances in 1998. 

This also represents a nearly 12% increase from a year ago and a 58% jump from the same time period in 2009.  Nearly 10% of participants increased their deferral rate in the first quarter of 2011, the largest percentage taking such action since Fidelity started tracking the figure in 2006.

Regarding separations from plans, about one-third of participants move their money from a former employer’s plan within four months after a job transition. Those who remain in their plan do so for several reasons:

• 71% said they are consciously keeping their assets in an old plan for the time being; of those 59% were satisfied with the plan features, services or investments.
• 27% said that a lack of time or “mind share” has prevented them from taking any action.

When respondents were asked if they are planning to take any action within the next year, 24% were not sure, and 18% were going to move the money to an IRA or their current employer’s workplace savings plan. But 57% intended to keep their investments in their old plan for the next 12 months.

While consolidation and control of assets (35%), more investment options (26%) and lower fees (37%) were the top reasons they would move their former workplace plan assets to an IRA or new workplace plan, the decision overwhelms many investors, the plan provider said.

“Quite often when an investor leaves a job, they have a significant portion of their retirement savings in that former employer’s plan,” said Walsh. “This is why it’s critical for investors to consider their options carefully. Fidelity has trained representatives that can educate investors and then help them determine which option may make sense based on their individual needs.”

By 2025, six major emerging economies—Brazil, China, India, Indonesia, South Korea, and Russia—will account for more than half of all global growth, and the international monetary system will likely no longer be dominated by a single currency, a new World Bank report says.  

The report, Global Development Horizons 2011—Multipolarity: The New Global Economy, projects that emerging economies will grow on average by 4.7% a year between now and 2025.  Advanced economies, meanwhile, are forecast to grow by 2.3% over the same period, yet will remain prominent in the global economy.  

Most developing countries, particularly the poorest ones, will continue to use foreign currencies to carry out transactions with the rest of the world, and will remain exposed to exchange rate fluctuations in an international multi-currency regime.  

“Over the next decade or so, China’s size and the rapid globalization of its corporations and banks will likely mean a more important role for the renminbi,” said Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank. “The most likely global currency scenario in 2025 will be a multi-currency one centered around the dollar, the euro, and the renminbi.”

Global Development Horizons’ authors use empirically-based indices to identify high-growth countries with strong human capital and technological innovation, and that also drive economic activity in other countries. Growth spillovers are likely via cross-border trade, finance, and migration, which will induce technological transfer, and increase demand for exports.

The report highlights the diversity of potential emerging economy growth poles, some of which have relied heavily on exports, such as China and Korea, and others that put more weight on domestic consumption, such as Brazil and Mexico.

With the emergence of a substantial middle class in developing countries and demographic transitions underway in several major East Asian economies, stronger consumption trends are likely to prevail.

The shift in economic and financial power toward the developing world has important implications on corporate financing, investment, and the nature of cross-border merger and acquisition (M&A) deals.

As more deals originate in emerging markets, South-South FDI is likely to rise, with most of it going into greenfield investments, while South-North FDI is more likely to target acquisitions. As they expand, more developing countries and their firms will be able to access international bond and equity markets at better terms to finance overseas investments.

The growing role and influence of emerging-market firms in global investment and finance can facilitate moving forward with the sort of multilateral framework for regulating cross-border investment that has been derailed several times since the 1920s, the report says.

In contrast to international trade and monetary relations, no multilateral regime exists to promote and govern cross-border investment. Instead, the surge of bilateral investment treaties (BITs) —more than 2,275 BITs as of end of 2007—has provided the most widely used mechanism for interstate negotiation over cross-border investment terms, including access to international arbitration of disputes through referral to the International Centre for the Settlement of Investment Disputes, an affiliate of the World Bank.  

To maintain the solvency of the combined Old Age and Survivors Insurance and Federal Disability Insurance Trust Funds for the next 75 years, the combined payroll tax rate could be increased by 2.15 percentage points, scheduled benefits could be reduced by 13.8%, or some combination of the two could be adopted, says the annual report of the funds’ trustees, released last Friday. 

The report’s summary is reprinted below:

In 2010

At the end of 2010, about 54 million people were receiving benefits: 37 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 10 million disabled workers and dependents of disabled workers.

During the year, an estimated 157 million people had earnings covered by Social Security and paid payroll taxes. Total expenditures in 2010 were $713 billion. Total income was $781 billion ($664 billion in non-interest income and $117 billion in interest earnings), and assets held in special issue U.S. Treasury securities grew to $2.6 trillion.

Short-Range Results

The assets of the OASI Trust Fund and of the combined OASI and DI Trust Funds are projected to be adequate over the next 10 years under the intermediate assumptions. However, the assets of the DI Trust Fund are projected to steadily decline under the intermediate assumptions, and would fall below 100 percent of annual cost by the beginning of 2013 and continue to decline until the trust fund is exhausted in 2018. The DI Trust Fund does not satisfy the short-range test of financial adequacy, which requires that the trust fund remain above 100 percent of annual cost throughout the short-range period.

The combined assets of the OASI and DI Trust Funds are projected to grow throughout the short-range period, from $2,609 billion at the beginning of 2011, or 353 percent of annual cost, to $3,526 billion at the beginning of 2020, or 284 percent of annual cost, under the intermediate assumptions. This increase in assets indicates that annual cost is less than total income throughout the short-range period. However, annual cost exceeds non-interest income in 2011 and remains higher throughout the remainder of the short-range period. For last year’s report, combined assets were projected to be 353 percent of annual cost at the beginning of 2011 and 299 percent at the beginning of 2020.

Long-Range Results

Under the intermediate assumptions, OASDI cost generally increases more rapidly than non-interest income through 2035 because the retirement of the baby-boom generation increases the number of beneficiaries much faster than subsequent lower-birth-rate generations increase the labor force.

From 2035 to 2050, the cost rate declines due principally to the aging of the already retired baby-boom generation. Thereafter, increases in life expectancy generally cause OASDI cost to increase relative to non-interest income, but more slowly than prior to 2035. Annual cost is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period. However, total income, including interest earnings on trust fund assets, will be sufficient to cover annual cost until 2023. The dollar level of the combined trust funds is projected to be drawn down beginning in 2023 until assets are exhausted in 2036. Individually, the DI Trust Fund is projected to be exhausted in 2018 and the OASI Trust Fund in 2038.

The OASDI annual cost rate is projected to increase from 13.35 percent of taxable payroll in 2011 to 17.01 percent in 2035 and to 17.56 percent in 2085, a level that is 4.24 percent of taxable payroll more than the projected income rate for 2085. For last year’s report, the OASDI cost for 2085 was estimated at 17.47 percent, or 4.16 percent of payroll more than the annual income rate for that year. Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.8 percent of GDP to about 6.2 percent in 2035, then to decline to 6.0 percent by 2050, and to remain between 5.9 and 6.0 percent through 2085.

For the 75-year projection period, the actuarial deficit is 2.22 percent of taxable payroll, 0.30 percentage point larger than in last year’s report. The open group unfunded obligation for OASDI over the 75-year period is $6.5 trillion in present value and is $1.1 trillion more than the measured level of a year ago. If the assumptions, methods, starting values, and the law had all remained unchanged, the unfunded obligation would have risen to about $5.8 trillion due to the change in the valuation date.

Conclusion

Under the long-range intermediate assumptions, annual cost for the OASDI program is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period. The combined OASI and DI Trust Funds are projected to increase through 2022, and then to decline and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036. However, the DI Trust Fund is projected to become exhausted in 2018, so legislative action will be needed as soon as possible. At a minimum, a reallocation of the payroll tax rate between OASI and DI would be necessary, as was done in 1994.

For the combined OASDI Trust Funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 2.15 percentage points, scheduled benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 13.8 percent, or some combination of these approaches could be adopted. Significantly larger changes would be required if current beneficiaries and those close to retirement age were to be held harmless, or if trust fund asset levels were to be stabilized at the end of the 75-year projection period.

The projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually and workers and beneficiaries can be given time to adjust to them. Implementing changes sooner would allow the needed revenue increases or benefit reductions to be spread over more generations. Social Security will play a critical role in the lives of 56 million beneficiaries and 158 million covered workers and their families in 2011. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.

Dear editor,

Here are my observations after reading your article, “Channel Surfing for Low-Cost SPIAs” (Retirement Income Journal, May 11, 2011):

I can’t tell you how many times I’ve been contacted by clients or advisors who are implementing a SPIA into a retirement plan and have already collected their “lowest cost” SPIA quotes from all of the sources—only to discover that the final arithmetic reveals a different answer.

The cost of a SPIA is not limited to the amount that is applied to the contract. The total cost also includes the distribution charge (1.5% to 2.5% of premium), plus the fee charged by the advisor or institutional platform (0.25% to 1% for a period of years)—as well as the cost associated with using after-tax money to pay those fees. If the SPIA is purchased with pre-tax money (from a qualified account or with an exchange of assets from an existing deferred annuity), the fees may have to be paid with money from an after-tax account. To the extent that this expense isn’t fully deductible on the individual’s tax return, it could add to the cost of the purchase.

The more difficult challenge when purchasing a SPIA, however, is designing it (by choosing a period certain, installment refund, cash refund, COLA adjustment, living commuted value, or death benefit commuted value, etc.) to fit the overall architecture of the client’s retirement plan, including other income resources, assets and tax planning.

The answer to the question, “What is the true lowest cost of purchasing a SPIA?” is often very different from the first answer, once all the fees, taxes and charges have been calculated.

Curtis Cloke, CEO, Thrive Income Distribution System, LLC. (www.thriveincome.com)