Obviously this years budget was a disappointment to me, and like any good lefty I was swearing at the television for the duration of the announcement. There was one announcement however which didn’t immediately cause me rage. The rage has come later, and on reflection. By removing the obligation to buy an annuity when one retires the distribution of power and wealth in society will change profoundly (1). Rather than being forced to hand over a large chunk of our savings to financial intermediaries who have every incentive to sit on safe assets and return you low but stable income (after fees…), individuals now have control over there retirement money. Some will lose it in high risk investment strategies, some will stuff it under the mattress, others will lapse into the old annuity ways. However, the main claim that this is an increase in power and autonomy for the little guy is a ridiculous assertion, and almost certainly a lie.
The reaction to all of this has been muted, and it’s easy to see why. It seems very much like the sort of thing that liberals should like, giving individuals control of their savings, that sure sounds like more freedom for more people. And given the state of the annuity industry, with some high fees and shady practices around (2), it’s easy to see why this might sound appealing. The problem with freedom however, in the liberal mindset, is that we’re still working in a kind of Randian ‘negative freedom’ paradigm. We look at a reform like this, see that the state is allowing us to do something new, and welcome this as ‘more freedom’, but this is too narrow an understanding, as I’m sure is clear when it’s put in these terms.
The trouble with having options is that the state is not the only source of coercion. For example, if I have the option to sell myself into slavery, someone with more power than me might be able to force me to do that. A recent discussion of the ethics of a market in organs makes the powerful point that opening up this ‘freedom’ would naturally mean that ones organs are considered an asset, and so in terms of discharging debts, they would become fair game(3). Is a person who has the option to sell a kidney to pay his overdraft more or less free? In other words, giving people options that they may be coerced or tricked into taking when it’s not in their advantage is a bad idea. This is why we don’t let people enter into certain kinds of contracts, or allow people to buy investment products without checking suitability.Suitability is surely key here. What could possibly be more suitable for a retiree than a product which guarantees to give them an income in perpetuity? As all those disclaimers helpfully say, the value of your investments can go up as well as down. Given the option to manage their own money, people will not do well. Not everyone is a good trader, though most think they are above average… Professional money managers and life insurers pool the kind of risks that individuals suck at dealing with, and employ specialists armed with years of training to manage them. This is not an advert for annuity providers, many charge high and opaque fees or simply don’t do that well at their jobs, but fees could be made more transparent with legislation and better regulation and transparency could help fix this. Instead, many people will now have the option to pursue much worse courses of action, and through coercion and trickery, will end up doing it.
In 2050, we will reap what we sow as we bear the cost of supporting older folks who were convinced to take lump sums, or buy brazilian rainforest ETF’s, or whatever other nonsense will fill the gap left by annuity providers.Once again, the only freedoms that we are prepared to afford people are freedoms to be taken for a ride. This legislation opens up a whole new and lucrative business for the hucksters, and whole bunch of opportunities for people who don’t know what they’re doing to bring themselves to financial ruin. A bunch of upper middle class people wanting to draw down their pension money will be delighted, but many of them will be diddled too, by their own bad judgement or by others. We will all pay for this short sighted nonsense. The government of the day should be deeply ashamed.