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A-TIPS: Lifetime Income Backed by the U.S. Treasury

A proposal for Amortizing Treasury Inflation-Protected Securities, or A-TIPS, holds promise for future defined contribution plan participants.

Imagine a retirement savings program that paid out a steady income every month for 30 years, fully guaranteed by the government, and also guaranteed to keep up with inflation. And the plan sponsor didn’t have to cover a penny of it.

Such a program doesn’t exist, but Ralph Goldsticker, a senior investment strategist at BNY Mellon Asset Management, has proposed one. And an enthusiastic supporter, pension officer Kevin Hanney, thinks he’s seen signs of interest from the Treasury.

“I’ve spent a lot of time trying to think about market-based solutions to retirees’ problems,” Goldsticker says. “I’m looking for a solution that gives people a little bit more confidence.”

There are a few catches. Since all the money would have to come from an employee’s own accounts, whether it provided enough to live on would depend on how much the employee had saved. It might not work for the average person. Moreover, if structured as Goldsticker proposes, this would seem to violate the old adage about saving for a rainy day. There would be nothing left for the retiree’s heirs.

“If you need every dollar of income yourself,” Goldsticker replies to such criticism, “your heirs are going to figure out how to take care of themselves. I’m not counting on anything from my parents.”

Called Amortizing Treasury Inflation-Protected Securities, or A-TIPS, these new vehicles would work like standard federal TIPS except that they would also pay a portion of principal in addition to interest, until the entire principal was exhausted at maturity. Goldsticker thus calculates that “the payments are maybe going to be twice as high as a traditional TIP.” An investor who hoped to live beyond the maturity date could add a deferred annuity that would pick up at that point.

As Goldsticker sees it, these A-TIPS would substitute for all or part of the fixed income portion of a 401(k), Individual Retirement Account, or any other savings account. Most likely the investor would purchase them right at retirement, since they would start to pay immediately.

In some ways, this system would actually be better than a traditional pension plan. Those plans haven’t had inflation riders for years, and the federal Pension Benefit Guaranty Corp. caps the maximum payout it will cover. However, A-TIPS would be part of a defined contribution system, with all the burden on the employee.

Why not use existing inflation-guaranteed savings vehicles, like laddered TIPS and inflation swaps? The former are too complex, Goldsticker says, while the latter aren’t government-guaranteed, points out Hanney, the director of pension investments at a large plan sponsor in the northeastern United States (he didn’t want the company’s name published). Annuities also lack the government backing and aren’t inflation-adjusted.

Goldsticker officially proposed his idea in an open letter to Treasury Secretary Timothy Geithner, published in Barron’s in November. Hanney also brought it up when he testified in September at a special hearing on long-term retirement savings, co-sponsored by Treasury and the Department of Labor. While he was testifying, Hanney says, he was “very encouraged” to see that “the people from Treasury on the panel started taking copious notes.”

Goldsticker admits that responses from the industry have “died out pretty quickly” since the Barron’s article, but he and Hanney say they’re not discouraged. Goldsticker says he will follow up on letters he sent to his congressional representatives, and Hanney plans to visit the Treasury.

Hanney even thinks A-TIPS could help reduce the federal deficit, by attracting a wider group of buyers than standard TIPS. That could mean a big, fast cash infusion.

Of course, soon afterwards the feds would have to start paying out more money, more quickly than with regular TIPS.

Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.

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