Are annuities appropriate for the elderly? The Securities and Exchange Commission and the National Association of Securities Dealers say not necessarily.

The SEC also today issued an alert to remind investors that variable annuities are not suitable for all consumers, especially investors who need the money in the short term or who borrow against their home mortgage in order to purchase a variable annuity or variable life insurance product.

The Washington Post story on the SEC/NASD report has this quote.

“We’ve seen a lot of sales to the elderly, and your money is tied up for so long that it can create real issues for people who need it for health care,” said Mary Schapiro, vice chairman of NASD, the main self-regulatory body for brokers. “We want to get ahead of the issue.”

This sounds like what I wrote here, except that I was talking about Social Security, arguing against Peter Diamond’s view that Social Security makes up for the failure of seniors to annuitize enough of their income.

I doubt that elderly people who maintain their assets in lump sum format rather than as annuities are as irrational as Diamond and others suggest. In the real world, the elderly face many more sources of uncertainty than just their date of death. For most other sources of uncertainty, a lump sum provides better protection than an annuity.

For example, take the risk of a sudden jump in expenses, due to a medical problem or other crisis. If you have a lump sum, you can handle the spike in cash needs without having to take out a loan.

So, on the one hand the government forces senior citizens to annuitize their income through Social Security. On the other hand, it accuses the private sector of being too aggressive in marketing annuities and that annuities are not necessarily appropriate for all seniors.

For Discussion. Peter Diamond argued that seniors should annuitize more of their income, and that Social Security is a good thing because it forces them to do so. The SEC/NASD report says that seniors should not necessarily annuitize their income. Can those two positions be reconciled?