Should the government get into the insurance biz?

Well, Professor Terrance Odean, Professor of Finance at UC Berkley, thinks so.

From an Op-Ed in the NYT:

Anyone planning for retirement must answer an impossible question: How long will I live? If you overestimate your longevity, you might scrimp unnecessarily. If you underestimate, you might outlive your savings.

This is hardly a new problem — and yet not a single financial product offers a satisfactory solution to this risk.

We believe that a new product — a federally issued, inflation-adjusted annuity — would make it possible for people to deal with this problem, with the bonus of contributing to the public coffers. By doing good for individuals, the federal government could actually do well for itself.

Prof. Odean thinks the government could actually play the role of Ultimate Backstop.  Annuity buyers pay a premium to an insurance company in return for a “guaranteed” payment stream.  Of course, nothing is guaranteed and investors are subject to default by underwriting insurers.

The U.S. government doesn’t face the same default risk (though theoretically does face some risk).  Here’s how it would work:

  1. investors would enroll in a qualified retirement plan (like a 401k) and choose an annuity option
  2. investors would receive payouts based on a variety of factors like mortality tables and interest rates

Proponents of this product (hey, roll-em up and issue an ETF that tracks them) believe that the Treasury would even benefit from such a plan as it decreases reliance on foreign lenders and expands the domestic investor base.  While I don’t particularly like government meddling, it’s an interesting idea.

Prof Odean is a Tradestreaming favorite and his works have been incorporated into much of my book.  He’s done great, insightful work on investor overconfidence-caused underperformance, overtrading (which is also caused in part by overconfidence), expenses and mutual fund flows.


Paying for Old Age (New York Times) Feb 25, 2011