GAO Retirement Income Study Bullish on Annuities

At the request of Wisconsin Senator Herb Kohl, the Government Accountability Office (GAO) just released a study that provides an assessment of the current state of the retirement income market in the United States.

For those interested in retirement income, the study is full of interesting data and conclusions. Some of the highlights include:

Most retirees rely primarily on Social Security and pass on the opportunity to create additional sources of guaranteed income through annuities.
Social Security provides a 55.2 percent replacement rate for low earners retiring in 2011. This means that other sources of income must provide the other 19.8 percent if these retirees are to reach a 75 percent replacement rate. Low earners are defined as someone with career earnings that are 45 percent of a national index (with the average wage in this index $40,711.61), while high earners are 160 percent of the index.
Social Security provides a 33.9 percent replacement rate for high earners (as defined above) retiring in 2011. This means that other sources of income must provide the other 41.1 percent if these high earning retirees are to reach a 75 percent replacement rate.
The report provides recommended savings strategies by income level (in quintiles) for near-retirement households.
The report strongly advocates delaying Social Security and provides the basic reasoning for why this almost always makes financial sense.
The report discusses in-plan annuities and the possibility of a compulsory aspect to annuity availability for defined benefit (401k) plan sponsors.
The report advocates inflation-adjusted annuities for “middle income” (net worth of $350,000 including equity in primary residence) households that do not have access to a defined benefit pension plan. Longevity risk appears to be the primary factor in this recommendation.