Clarifying SeLFIES: Addressing Retirement Income Challenges.pdf

The article discusses SeLFIES (Standard-of-Living indexed, Forward-starting, Income-only Securities), a proposal by Robert C. Merton and Arun Muralidhar to address retirement income challenges faced globally due to the shift from employer-defined benefits to individual responsibility for retirement savings.

SeLFIES are designed to mimic pension payments, offering a straightforward solution for individuals without access to quality financial advice. They require only two inputs: anticipated retirement date and target income goal, with payments starting at retirement age based on standard-of-living adjustments.

The proposal suggests the federal government issue special bonds paying $5 per year adjusted for living standards, covering an average life expectancy period of 20 years. Individuals can purchase SeLFIES to fund their desired retirement income by dividing their target income by $5.

SeLFIES aim to provide lifetime payments and protect against longevity risk, allowing retirees to annuitize or not based on personal circumstances at retirement. They offer flexibility for those who wish to leave assets to heirs while providing a hedge against longevity risk for insurance companies through exchange with life annuities.

Insurance companies could use SeLFIES as hedging instruments due to their diversified portfolios across cohorts, facilitating an efficient annuity market. Additionally, SeLFIES can serve as benchmarks in implementing proposals like Richard Thaler's Social Security enhancements and improve retirement funding security by offering guaranteed income.

SeLFIES issuance is not limited to the federal government; states could issue them as part of Secure Choice plans or infrastructure funding, benefiting from tax exemptions for personal taxable accounts.