Annuities, r-star and Your Savings

An annuity is a contract that turns a lump sum into a guaranteed income for life. You hand over money now, and in return you receive regular payments for as long as you live. It is insurance against a particular risk: living longer than your savings last.

Professor Slavov's point is that delaying Social Security works the same way. Each year you wait, you give up a year of payments. In return, every payment for the rest of your life is larger. You are, in effect, buying a bigger annuity, often at a better price than any insurance company would offer. The longer you live, the better the deal.

r-star, often written r*, is the interest rate at which the economy is neither being pushed to grow faster nor being slowed down. Economists cannot observe it directly, only estimate it, and for many years before the pandemic those estimates were very low.

Low interest rates are good for borrowers but hard on savers, because savings grow slowly. In the episode, Professor Slavov explains why low rates combined with slow wage growth hit mid-career workers hardest: they are at the stage of life when their savings most need to grow, and neither their wages nor their returns are doing much of the work.