Tontines may make sense despite their history of disrepute

http://www.washingtonpost.com/news/wonkblog/wp/2015/09/28/this-sleazy-and-totally-illegal-savings-scheme-may-be-the-future-of-retirement/

by lisper • 11 years ago

67 73 11 years ago

washingtonpost.com

krisroadruck2• 11 years ago

Isn't this basically exactly how social security works? The longer you live the more profit you receive? It's why social security has been repeatedly called sexist. Women tend to live longer, thus draw more social security, yet men tend to contribute more in social security taxes during their working years than women. A double loss prospect for men and a double win for women.

lisper2• 11 years ago

No, a tontine is structured differently. In a tontine there's a fixed pot of assets allocated to a fixed population of beneficiaries. In social security, neither of those is fixed.

toomuchtodo• 11 years ago

Social security is more like car insurance, this is more like Russian roulette.

jonnycowboy• 11 years ago

Double win for women, because they get paid less for the same work throughout their life??

aianus6• 11 years ago

because they get paid less for the same work

That's not true, women earn less than men overall because they choose to do different jobs.

krisroadruck2• 11 years ago

Intentionally obtuse much? Its a double win because they both pay less in and take more out. Gender wagegap is another discussion entirely but I'll just leave this video here as my answer to THAT discussion: https://www.youtube.com/watch?v=EwogDPh-Sow

panic• 11 years ago

How is what you describe sexist? From your perspective, what would be a non-sexist way of paying out social security?

jeremyt• 11 years ago

You fund your own personal social security account.

aianus6• 11 years ago

what would be a non-sexist way of paying out social security?

Increase the payroll deductions for women seeing as how they live longer, same way my car insurance costs more than if I were a woman.

usefulcat• 11 years ago

No, SS is similar to an annuity, at least in terms of how the distributions are structured. SS payments don't vary much (or at all?), whereas payments from a tontine would vary over time.

bradleyjg• 11 years ago

Social security payments have a cost of living adjustment based on CPI-W (a measure of inflation).

quotemstr• 11 years ago

Isn't this headline a little clickbaity?

dang2• 11 years ago

More than a little. We changed it to a representative sentence from the article. If anyone suggests a better (i.e. more accurate and neutral) title, we can change it again.

jessriedel5• 11 years ago

Please keep this up. This is a great service.

zeveb3• 11 years ago

The problem with this title is that it's the anti-clickbait, like 'Unusual Incident in New Jersey' would be for an article covering the Hindenburg.

I liked the original title; it's a good, well-written and engaging article, and the title drew me to it.

thesteamboat2• 11 years ago

On a couple of stories I've noticed discussion about changing the title, which is not always universally agreed with.

Is there a way to make this process more transparent, e.g. on changing title posting a comment "Changed title from [x] to [y] because it was clickbait".

I don't mean to disparage the great work you're doing moderating, and I don't want to throw pointless tasks at you for no reason, but I'm curious about the former titles (and wondering if others are wondering as well).

lisper2• 11 years ago

For the record, that was (more or less) the original title.

boxy3102• 11 years ago

But the new urban factory jobs were completely different. “These were often debilitating, strenuous occupations,” Sutch says. “People couldn't work in their old age.”

Isn't the problem with post-industrial societies that many office workers are capable of working for much longer? While life expectancy is definitely going up, it's growing unequally, with the highest wage-earners (and thus most likely to have office jobs) gaining life expectancy the fastest: http://www.washingtonpost.com/news/wonkblog/wp/2012/11/21/wh...

derekp72• 11 years ago

This sounds a lot like longevity insurance (a form of deferred annuity) which from what I've read is available now. Normally when you retire (with a decent size 401k or IRA balance), you have to take a guess at how long you will live, and draw it down at a rate that will last you. The safe bet is to guess you will live to 100, and that the fund will grow at 4-5%, but that may not leave you with enough annual income.

The idea of longevity insurance, is you buy something like a $50K policy at age 65, and the insurance company will pay you $70K a year for life after you turn 85. So you buy the policy up front, and adjust your 401k withdrawals so that fund runs out a age 85. Then the annuity takes over after that.

gwern2• 11 years ago

It doesn't directly compare with longevity insurance, but to me it sounds like all the advantages against annuities would carry over:

Annuities are expensive to administer, and so their payouts are rather low. The costs stem in part from paying the insurance company to shoulder all the risk. To guarantee it can make good on all its annuity contracts, the insurer has to set aside a lot of money in reserve — just in case people live longer than expected, or in case the market crashes. A tontine does away with all that overhead, so more money is available to the retirees. By Milevsky's calculations, a tontine might offer a 10 percent to 20 percent premium over an annuity — a bigger pie to be divided among the group. The downside is that retirees would see their payouts fluctuate depending on the various times other people in the tontine group died. Compared to an annuity, a tontine abandons certain payouts for much higher returns...Such a system would be cheaper to operate and would always, by definition, be fully funded. The funny thing is that some retirement systems already carry out a version of that process. As Milevsky documents in his book, there is "tontine thinking" embedded in various national pension schemes, and even in a product offered by TIAA-CREF in the United States. These plans adjust payments according to mortality. They just don't use the word tontine.

derekp72• 11 years ago

Just for reference (and to see if longevity insurance is a good deal), I ran some numbers using the SSA actuary tables (at http://www.ssa.gov/oact/STATS/table4c6.html). I ran a few scenarios as follows, assuming no administrative overhead:

1) If everyone in a given pool puts in $50k at age 65, the surviving members can withdraw $18k per year starting at age 85 -- any more and the fund runs dry.

2) If the fund is invested at an interest rate of 2%, they can withdraw $30k annually starting at 85 without the fund running out.

3) At 5% interest, that number goes to $62k.

For comparison, according to a random article on longevity insurance, Met Life quotes a payout of $15k per year (at 85) if $50k is invested at age 65.

Also, as another point of reference, if you invest 50k at 65 and get 5% returns, and withdraw 13k staring at 85, you will have enough to last you till age 96. So the longevity quote above really isn't that great of a deal.

RockyMcNuts• 11 years ago

Deferred annuities are, unfortunately a bit of a minefield for consumers - usually sold with high annual expenses, high commissions, and the insurance company takes the other side of the mortality bet: if people die earlier than expected the insurance company gets a windfall, if they die much later the insurance company takes a loss, and the annuity buyer is potentially exposed to credit risk if the insurance company fails (seems unlikely but a lot can happen over a 50-year accumulation and withdrawal period).

In my opinion, this is an example of regulation and taxation allowing gimmicky and expensive products and sometimes downright shenanigans, while blocking a simple, inexpensive solution to a universal problem.

What is insurance if not a pool of people coming together to share risks? What better sharing economy product than a crowd-sourced, peer-to-peer, life insurance solution.

I blogged a bit more on the subject here -

http://blog.streeteye.com/blog/2015/09/tontines-strange-name...

legitster• 11 years ago

I like the idea. It's funky. It could do to retirements what HSAs have done for health insurance. It also seems unnecessary that they are still illegal.

deutronium• 11 years ago

What happens if the tontine has a hitman as part of the group ;)

Reminds me a bit of https://en.wikipedia.org/wiki/Assassination_market

TrevorJ• 11 years ago

An episode of the show "Archer" covered this fairly hilariously.

patio11• 11 years ago

Tontines don't solve the elephant in the room, which is that people are substantially undersaving for retirement.

There exists no financial innovation which will provide for fully-funded retirements for 100 retirees each having $100k to invest. (Sourced below.) There is no way to slice that pool of $10 million in such a way that it increases the NPV of it to more than $10 million. It's underfunded by a factor of 10.

> The agency found the median amount of those savings is about $104,000 for households with members between 55 and 64 years old[.]

http://www.cnbc.com/2015/06/03/most-older-americans-fall-sho...

aianus6• 11 years ago

There exists no financial innovation which will provide for fully-funded retirements for 100 retirees each having $100k to invest.

You could start a retirement community in a third world African country where costs are lower. $100k is stretching it but $250k and they'd be fine for the rest of their lives.

Apofis• 11 years ago

Ship old people to Cuba, now that we're removing restrictions. Cuba will be the new Florida.

joshuaheard• 11 years ago

Isn't that the plot of The Best Exotic Marigold Hotel?

zeveb3• 11 years ago

Tontines don't solve the elephant in the room, which is that people are substantially undersaving for retirement.

If they encourage people to save more, then they'll reduce the problem.

They won't, however, solve the problem that people are simply spending too much. I don't know if anything can.

nostrademons2• 11 years ago

Sure there is: deflation. Increase the value of money by 10x and suddenly that $100K is plenty. Only problem is that anyone holding debt will end up bankrupt...which will just drive further deflation.

ForHackernews2• 11 years ago

There exists no financial innovation which will provide for fully-funded retirements for 100 retirees each having $100k to invest. (Sourced below.)

Sure there is! Nationalized sovereign wealth funds. Norway's has over $1.6 million available per citizen: https://en.wikipedia.org/wiki/Sovereign_wealth_fund#Largest_...

aianus6• 11 years ago

Striking oil is hardly a financial innovation. Norway just happened to hit the lotto and manage the wealth responsibly, they don't have a real economy.

Gibbon12• 11 years ago

This is basically social security. Less well known as Old-Age, Survivors, and Disability Insurance. Which is funded by the Federal Insurance Contributions Act tax. Careful readers will note the word 'Insurance' because that's what social security is. Insurance against living longer than your savings hold out.

Economists are funny. Soon as something is a government run program they're dead set against it.

mikeash2• 11 years ago

I personally find the whole question of savings to be a bit misdirected. Very little economic activity can be bottled up and saved for years. Money fools us into thinking in this way because you can save money for a long time and then use it, but that's really just a promise from the rest of society that they will eventually do something for you in exchange for what you previously did for them.

A certain amount of economic activity has to go towards supporting people in their old age, in order to supply them with food and housing and medical care and whatever else. Money is just how you convince working people to do all these things for retirees. It matters less where the money comes from, and more how much of the overall economy that encompasses, and what that means for non-retired people.

First-world countries are seeing massive demographic shifts towards old age, which means vastly more economic activity must go towards sustaining the retired, which means less resources available for other activities like building airliners, mining coal, or filing TPS reports. Either the economy needs to grow a lot, or some group is going to have to get by with less.

lisa_henderson• 11 years ago

About this:

"Very little economic activity can be bottled up and saved for years."

That might have been true for hunter-gatherer societies, 10,000 years ago, but since the advent of agriculture, and especially irrigation, human societies have been increasingly dependent on the build up of capital to support an ever more sophisticated civilization. 2,000 years ago, that capital took the form of roads, canals, breakwaters for ports, dykes, walls, structures and, especially, large scale irrigation projects. Modern societies rely on the build up of capital to a much greater extent -- certainly more than I can list in a comment. The capital has been accrued over many decades -- I once read an article in Scientific American that the housing stock of modern Western societies runs on a cycle of about 80 years. The modern build up of capital, on which we depend, would include every form of infrastructure that you could think of, including space-age items such as communication satellites, plus many types that may not be immediately obvious.

Somewhere in the world, each generation must suppress some of its consumption so as to contribute to the accumulation of long-term capital. It used to be that savings were mostly confined to the nation in which they were originated, but of course, over the last 50 years we've seen the globalization of savings, and we've seen vast distortions to the global system, thanks to some countries, such as China, whose government engaged in the systematic suppression of consumption, leading to what Ben Bernanke described as a "global savings glut".

Contrary to what you said, a great deal of economic activity can be bottled up and saved for years. Just because we live in an era in which there was too much saving and too little consumption does not mean that, in the long term, saving is unimportant.

If by "economic activity" you mean activity that supports current consumption, then this is exactly backwards:

"First-world countries are seeing massive demographic shifts towards old age, which means vastly more economic activity must go towards sustaining the retired"

The opposite is true: First-world countries are seeing massive demographic shifts towards old age, therefore the need to raise productivity is more urgent than ever. In the USA, 70 years ago, there were 10 workers for every 1 retired person. In 20 years, there will be 2 workers for every 1 retired person. There we need to see a 500% increase in productivity, over 90 years (measured from 70 years ago), to ensure that everyone can continue to enjoy the same quality of life.

In the past, the accumulation of capital played a large role in raising productivity, and therefore in the future capital might again play a large role in raising productivity. A vast campaign of investment is necessary, to raise productivity. Such a campaign is made easy in the current era thanks to the the low interest rates that were made possible via the global savings glut.

zeveb3• 11 years ago

This reminds me a bit of the concept of lottery savings accounts, in which principals are untouched and winners receive interest: it turns the common human desire to gamble towards good, rather than evil.

I like it, too, because it just seems fairer than an annuity: there's an upside as well as a downside.

herbig• 11 years ago

I like the idea of building this into bitcoin, where one only has to check into the blockchain somehow each year to continue receiving payments.

jessriedel5• 11 years ago

Had to read past many paragraphs of historical filler and other teaser trash to get to the meat:

Economists have long said that the rational thing to do is to buy an annuity. At retirement age, you could pay an insurance company $100,000 in return for some $5,000-6,000 a year in guaranteed payments until you die. But most people don’t do that. For decades, economists have been trying to figure out why....James Poterba, an economics professor at MIT who has extensively studied American retirement, says it’s still a mystery why annuities are so unpopular. ...But there’s also some evidence that people just irrationally dislike annuities. As behavioral economist Richard Thaler wrote in the New York Times: “Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even.” ... Here is where tontines come in. If people irrationally fear annuities because they seem like a gamble on one's own life, history suggests that they irrationally loved tontines because they see tontines as a gamble on other people's lives.

Right, so the answer is completely known, and now we're just speculating on what weird financial device will best play to people's economic ignorance. Luckily, the author sounds almost as confused, since you couldn't have a handle on economics and write this:

Retirees often object to annuities because they worry about not living long enough to make the money back. This is the nightmare scenario: If someone dies the day after she buys an annuity, the insurance company walks away with the cash scot-free. In a tontine, that money passes on to help fund other people's retirements.

linkydinkandyou2• 11 years ago

Another reason people are reluctant to use annuities is they don't trust the companies selling them to remain in business for 10 years or more....

jessriedel5• 11 years ago

Not sure about folks' actual reasoning, but I don't think that can be consistently squared with the popularity of life insurance. "The most common terms are 10, 15, 20, and 30 years."

aianus6• 11 years ago

Surely you would have a claim on their assets in this case? Any lawyers / accountants who can chime in?

tsotha3• 11 years ago

Insurance companies are pretty heavily regulated for just this reason.

phaemon• 11 years ago

Luckily, the author sounds almost as confused, since you couldn't have a handle on economics and write this:

Indeed. The author only has degrees in Mathematics and Economics from MIT.

jessriedel5• 11 years ago

Well then he panders to his audience's ignorance, which is even worse.

EDIT: Strike that. He doesn't have a PhD. I took the undergrad Econ courses at Princeton, and you could easily leave as confused as the author appears to be in this article.

kqr2• 11 years ago

One of the reasons that annuities are unpopular is that there are many types and potential pitfalls:

http://apps.suzeorman.com/igsbase/igstemplate.cfm?SRC=MD012&...

gwern2• 11 years ago

Fulltext links to the two cited papers: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2393152 , and https://www.dropbox.com/s/8ubxv59z524fq5s/1987-ransom.pdf / http://cyber.sci-hub.bz/MTAuMjMwNy8yMTIyMjM2/10.2307%4021222...

rmason• 11 years ago

The Barney Miller show had an episode in season 8 where the plot revolves around two surviving members of a Tontine.

http://www.imdb.com/title/tt0519144/

Turing_Machine• 11 years ago

There was also a very amusing British comedy on the subject, with Michael Caine, Ralph Richardson, Peter Cook, Peter Sellers, Dudley Moore, among others.

http://www.rottentomatoes.com/m/wrong_box/

jedberg2• 11 years ago

How do you address the problem that the longest lived participants get the majority of their payout when they are really old? Basically you're just concentrating a lot of wealth into the hands of the long lived and their offspring that they pass it to when they die shortly after getting their large payouts.

I'm now imagining a scenario where this catches on and in a few generations the life expectancy has a major bifurcation, as those that were already destined to live longer through genetics now get an extra boost via inherited wealth.

nostrademons2• 11 years ago

This is already happening, as people with more money, more skills, and better health mate with other people like themselves, passing on their genes/wealth/knowledge to their offspring. (Health, wealth, and IQ are all correlated.)

As for what happens next...I think someone wrote a book about that:

https://en.wikipedia.org/wiki/The_Time_Machine

jedberg2• 11 years ago

Now you've got me wondering if that was intentional symbolism in the book or not. :)

shalmanese• 11 years ago

I wonder what effect tontines would have on healthy behaviors. Traditionally, we've found that very little moves the margin on getting people to enact healthy behaviors but perhaps the motivation of beating your peers for financial gain might actually move the needle.

njloof• 11 years ago

This seems related to what corporations were doing when they were taking out life insurance on their employees.

Camillo• 11 years ago

This is because royal financing in the late Middle Ages was a tricky thing.

I'd just like to point out that no part of this story has anything to do with the Middle Ages. De Tonti and Louis XIV lived in the Modern age.

teslaberry• 11 years ago

all insurance of all types are a scam. worse, they are tax subsidized.

gambling is also a scam. gambling is a version of 'insurance' for the activity of 'entertainment' that is called 'gambling'. there is NO gain to be had for the gambler in the long run.

similarly, the insured will lose MORE money in the long run paying for insurance as he would , statistically, in the short run. the idea that insurance would prevent you from sudden ruin in case of an accident is also a lie. plenty of insurance companies don't pay out entirely or resist paying enough to prevent ruin.

by paying for insurance, society is guaranteed higher overhead in the long run , higher litigation costs, and higher moral hazard as well as the rise of scammers of insurance companies.

all this activity is a total waste and only works because of the tax subsidy of the insruance industry scam.

if working people simply didn't have to pay ANY tax on labor including the scam of payroll ss. and healthcare tax on labor than you would see how rich the working classes would become how quickly. insurance companies have stolen the right not to pay tax on a scam, which guarantees that their scam's attract even more investors.

it's called the FIRE economy. READ ABOUT IT.

saretired• 11 years ago

The idea is you give up return of principal for a bet on the NPV of coupons during your life. Which is a gamble, and quite tidy too: nothing to leave to one's heirs for all but one of the participants[1]. But also a gamble on a particular pool of assets. "At retirement, you and a bunch of other people each chip in $20,000 to buy a ton of mutual funds or stocks or whatever." But these "whatevers" are volatile assets that will produce losses in some years--the opposite of the usual advice to lower volatile asset holdings at retirement. So now it's a double bet: first on NPV/longevity, and second on the health of the underlying assets. Exactly the kind of thing that Wall St would love to sell to the public.

[1] All of the underlying assets being transferred to the last survivor is one type of tontine; in another, certain to be a favorite of Wall St., the underlying would be transferred to the plan manager after the death of the last participant.

Tontines may make sense despite their history of disrepute

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