Imagine buying into a retirement savings pool in which you bet you’ll live longer than the other investors. As you get older and your peers start dying off, your share of the payouts grows; if you die first, they get the cash.
It might sound like the set-up to a morbid whodunit, but “tontines,” as these insurance pools are known, were actually the most popular retirement savings plan in the 1800s.
But now as retirees are living longer than ever, some say a tontine (pronouced “tawn-Teen”) is an appropriate system to bring back for the 21st century: Americans retire at an age that they’re still able to work, and tontine payouts would naturally increase as recipients lose vitality.
“This might be the iPhone of retirement products,” Moshe Milevsky, an associate professor of finance at York University in Toronto, told The Washington Post.
Retirement plans were hardly needed before the Industrial Revolution – parents simply relied on their children for support when they grew old. But as people moved from farms to cities, families spread out and moving in with the kids became less of an option. That’s when tontines stepped in.
“The popularity of tontines would be their downfall,” The Post reported. Public opinion always viewed tontines with some disdain, but it was ultimately poor regulation that killed them off. As insurance profits grew, so did industry corruption, and dishonest bookkeeping became rampant. New York state banned the industry in 1906. Others states followed suit and eventually wiped out tontines.
In an article this year, the University of Pennsylvania Law Review argued that “the time has come to revive tontines as a way of providing reliable, pension-like income for retirees.”
“The key point is that variations on the tontine principle – that the share of each, at death, is enjoyed by the survivors – can be used to create a variety of attractive retirement income financial products,” the paper argued.
Pensions have widely dried up and there are fears Social Security could become insolvent by 2030. Jack Guttentag of The Huffington Post said there are good ways for the premise of a tontine to be incorporated in modern systems, including reverse mortgages and retirement communities.
Instituting tontines into retirement communities is exactly what Milevsky had in mind when he wrote a book in support of tontines. He told Market Watch that a small-scale tontine would be more efficient than a large insurance company, and that dividends could be up to 20 percent higher.
Tontines could also fill a market need. A 2014 survey by Fidelity Investments found that only 24 percent of Americans are on track to meet their retirement needs.