I don't see how this is really different from an annuity beyond getting a bonus payment when someone dies and not being funded in a way that you're sure the money won't run out prematurely.
With an annuity, a company sells you a plan that will pay you $X/mo for a lump sum of $Y. Those that die below actuarial estimates end up paying in more than they get out while those that continue living get the profits from it.
I guess the difference is that with an annuity, you're expecting the monthly payments to be pretty close to what you're paying in over a normal life expectancy. So, a million dollar annuity with a 10-year life expectancy might net you $8,000-$8,500/mo. By contrast, a tontine would see you put in a million dollars and then maybe get $3,000 per month with a 10-year life expectancy with those that outlive others getting more money as time goes on. So, if you live long and others die, your payment might go up to $10,000 or $15,000. Is that the point of the tontine?
But why on earth would that be the future of retirement? An annuity is predictable. The risk is borne by the company selling it. With a tontine, you get unlucky and everyone lives long and you're in a bad situation. In the best case, your payments go up, but why would you want the chance at $10-15k after others have died rather than $8k predictably always?
An annuity already spreads the risk and uncertainty of life expectancy. That's the problem we're trying to solve. An annuity already lets you profit off those who die early who have paid in more than they take out - and if you live long you get more than you paid in. If you want to add the morbidity of the tontine to your retirement plan, take out life insurance policies on your friends and cash in when they die young and lose money if they live a long life. Combined with an annuity and you basically have the tontine. You get regular payouts from the annuity and you profit when your friends die via life insurance policies on them.
But looking at that, why bother with the life insurance policy? Why wouldn't you just get the annuity and have a predictable, steady income?
* You might not like companies that sell annuities and think they aren't a good investment. However, they're sound compared to some hacked-together, crowd-sourced thing that isn't backed by someone reliable with deep pockets. I won't personally buy an annuity, but they're based off spreading the risk in a conservative enough way to guarantee predictable funds (along with a reasonable profit for the company). An under-funded tontine that has people live longer than expected would simply run out of money and leave people destitute.
This is completely correct. The only reason these sorts of silly financial instruments are available, and the only reason you're not at the top of the thread, is because the level of basic economic literacy is so low.
The question of why annuities are relatively unpopular is an interesting social/institutional one. From talking to some financial planners, it sounds like some crooked origins gave them a bad reputation (like used cars) that they have struggled to shake. Even today there are an unusual number of scummy annuities, although it's much lower than in the past. I suspect it's because they have several moving parts, and are a bit harder for the financial unsavvy to value and compare between companies, so the market gets more swindlers.
EDIT: I previously also wrote "and the only reason this article is in the Washington Post without directly addressing these points," which is incorrect, as
roymurdock helpfully pointed out.
A few potential reasons they're interesting compared to annuities: they're more honest about the risk, the risk is easier to understand, the risk is incremental rather than binary, and the lottery aspect might encourage better saving behavior/make them more marketable than annuities.
Annuities are typically sold as "risk free", but you have the risk of the insurance company becoming insolvent. A tontine's risk of everyone living longer is obvious. Since annuities have general credit exposure to the insurance company, to understand the credit risk you need to understand all of the insurers lines of business. A tontine with segregated assets doesn't depend on the other business of the manager for solvency. Some of these issues with annuities can/are mitigated by regulation, but that's another thing you have to understand in order to understand the risk. Customers understanding the risk should lead to better decisions about how much to rely on it.
Because annuities have guaranteed payments, if life expectancy increased the insurance company would continue paying out an an unsustainable rate, and when it ran out of money benefits would go from 100% to 0%. A tontine would instead reduce payments incrementally so that it's always sustainable.
Finally, people don't always make financial decisions in the way economic theory suggests they ought to. In particular, people buy way more lottery tickets than economists think they should, and way fewer annuities. If you sprinkle a little bit of lottery into an annuity it might become more marketable, leading to better average financial decision making.
The thing that I feel is relevant is: "The risk is borne by the company selling it." That risk means that they have to give you a very bad rate to cover their risk and still make a profit.
With a Tontine the risk in the return is borne by the individual who can therefore share in the upside as well as the downside.
Having worked both in Finance on Wall Street - for an ethical shop with quality employees in a modest market (Munis) - and in Insurance/Risk Management, I can off-hand say that I think the actuaries and quants in Insurance are easily comparable in talents and abilities with Finance peers. Thus, I think some 'structured products' from the Insurance industry - rather than Finance as most people might think of it - are worth consideration. Sure, both avenues are regulated, but scams will show up in any industry. What I'm getting at is Insruance isn't supposed to be "flashy" - the numbers are supposed to work.
As an aside, I do see the two trying out new, potentially risky synthetics called Insurance Linked Securities. Not sure it has been much of a market in the past - existed, sure, but there's a lot of sloshing Central Bank injected money looking for returns...and pension funds...and, well, everybody. Eek!
I thought much the same thing. The price and returns of the annuity assumes that some people will die before life expectancy, and others will die later. I don't see what's unethical about that.
There are 3 big problems with pensions. Firstly, people contribute too late, so they don't get the benefits of 50 years of compound interest and stockmarket booms. Second, many companies mismanage them - see the current Philip Green at BHS debacle in the UK for an example. Thirdly, too many people don't contribute anything at all (for whatever reason), but still need some kind of income in their old age.
I don't see how tontines get round any of these problems.
My favourite example of death related investment is the French housing system, viager. You can buy the rights to a house, but you only get the deeds once the current owner dies. In return for paying the current (often elderly) owner a modest monthly rent plus a lump sum, you get the house for a low price (e.g. 50% off). The lump sum is a fraction of the discount price and the rent is, keeping it morbid, based on French life expectancy.
The fun part is you aren't allowed to ask explicitly how healthy the owner is, so it's a total gamble. You might be stuck paying rent to someone who lives until they're 100 or they could die in an "accident" tomorrow. So in addition to checking the walls for damp when you go round, buyers surreptitiously look for medication and disability aids. Presumably some people also go to the trouble of stalking the current owners to gauge how close they are to the coffin.
To make things more exciting, if your parents bought a house en viager and they leave it to you in their will (but the owner hasn't died yet), you're on the hook for the payments. If you don't keep them up, the owner can re-sell the house.
"Andre-Francois Raffray thought he had a great deal 30 years ago: He would pay a 90-year-old woman 2,500 francs (about $500) a month until she died, then move into her grand apartment in a town Vincent van Gogh once roamed.
But this Christmas, Mr. Raffray died at age 77, having laid out the equivalent of more than $184,000 for an apartment he never got to live in.
On the same day, Jeanne Calment, now listed in the Guinness Book of Records as the world's oldest person at 120, dined on foie gras, duck thighs, cheese and chocolate cake at her nursing home near the sought-after apartment in Arles, northwest of Marseilles in the south of France."
Being French, I never heard of someone doing this with strangers.
On the other hand, it's a well known way to bypass succession fees : parents sell (or find a way to pass on without monetary exchange) the house in viager to their children, and continue living there until they die.
That way, even in a case where there is disagreement in the family later on, parents can't be forced out of the house.
My American university has bought property in this manner. There were several old houses on the fringes of the campus with elderly owners. The university bought the properties years ago, but the owners continued to live in them until they died. Once the property transferred, the university bulldozed the houses to build new research facilities.
This exists in Italy as well, but it usually doesn't include a rent. You just buy the house at a discount. It's very very common in areas which are rapidly gentrifying.
There is one problem with that. People can predict their own life expectancy. People who expect to live shorter will avoid such scheme.
To give an example: state pension in my (European) country is unfair to men. We live shorter and retire latter. In average women gets 45% more money for the same contribution. As result men are avoiding state pension and use private funds.
In Finland this is solved by it not being possible to avoid state pension. You can collect your additional stash, but if you're getting a salary, you will be paying to the pension fund.
Yes, women live longer, but in general have a bit smaller pension due to their time off the workforce because of motherhood, and (still) slightly lower salary levels. I don't consider this unfairness towards men any significant issue.
You can always add classes based on age or membership in the tontine to make it easier.
For example, a tontine of 1000 euros with 10 members, but since the last member is in the age bracket of 20-30 instead of 30-40, they get a smaller annuity than the rest.
The Wikipedia article about tontines mentions this:
> Because younger nominees clearly had a longer life expectancy, the 17th and 18th-century tontines were normally divided into several "classes" by age (typically in bands of 5, 7 or 10 years): each class effectively formed a separate tontine, with the shares of deceased members devolving to fellow-nominees within the same class.
A hybrid tontine system is the most common way to save for your pension in Denmark. It is not regarded as sleazy.
The companies that run the schemes, has historically been run by unions, and has historically given good yields on their wealth. The largest company of the type is state-owned and it gets money from an obligatory tax applied to all people working in the country.
The system will stop working, if politicians begins to tax these pension funds for infrastructure investment purposes, or the pension funds shifts people to financial products that prioritize individual savings/insurance.
This "tontine" system is probably the best investment, in terms of securing a good life after 65 years old, if you are among the survivors.
"There was rampant shadiness back in the day" ...this is an actual quote from a major paper? Maybe I'm just getting old, but this seems like unbelievably sloppy language for someone being paid to write.
> There was rampant shadiness back in the day, including countless swindles perpetrated on the public, both related and unrelated to the tontine. Bribery of newspapers and politicians was also routine, as was embezzlement and plain theft. Magazine exposés riled the public with stories of secret payments and secret blackmail of public officials.
And WaPo thinks our current financial industry can do better? Sounds a lot like NINJA loans and synthetic CDOs
...
It seems to me that the middle/upper middle classes moving from defined benefit (old school pension plans) to defined contribution (401k plans) was a chance for them to build up (and learn to sustainably manage) real capitalistic wealth that could be passed down to their kids. It's not a stretch to predict that to the extent the vast majority of these folks store their wealth in annuities, or similar plans that effectively evaporate upon death, the result will be much smaller estates/inheritances which would reinforce or even worsen the wealth inequality that exists today.
I don't think I would like to invest on something called "tontine"; "tonto" means dummy in Spanish. White Snow's Dopey is called "tontin" in Spanish. Lone Ranger's friend Tonto had to be renamed "Toro" as in bull.
My biggest concern is the direct benefit off the death of others causing a perverse incentive to kill. There are people who will mug and risk killing you over the money in your wallet, so I could definitely see people being killed over the money in one of these.
But insurance companies love selling insanely high-priced annuity products, and US laws around insurance, securities registration, taxes make it hard/impossible.
Regulation can be premature optimization / standardization. (or insurance company rent-seeking)
Damn, didn't take long to get to the real reason. Governments are scared shitless about the public pension default issue. The hundreds of billions of unfunded liability with regards to public employee pension payments has been well known and no good solution has been found. From straight up state employees to those working for transit authorities. The numbers of truly staggering.
So I guess need a new means to sell people on a lower payout? Perhaps this will also end up in a way taking over SS?
Pension funds in many cases operate similarly; their finances improve if beneficiaries die early, and in some cases they are required to pay out surplus returns above a certain level. The difference seems to be that pensions operate continuously (ie, they'd only see a demographic effect on payouts if there were a global decline in life expectancy) rather than on a defined batch of customers.
Can you construct an insurance instrument that behaves like a tontine without breaking the law?
I'm imagining some giant network of life insurance policies with thousands of beneficiaries on each policy and automatic rebalancing after every death.
I don't know, it just feels like a tontine (illegal in the US) can be constructed through what I assume are legal mechanisms.
I mentioned this in another comment, but I think it would be feasible to hire somebody for a small price to investigate the statuses of the participants once per year as well as implementing some sort of biometric dead man's switch.
[+] [-] lisper|9 years ago|reply
https://news.ycombinator.com/item?id=10299482
[+] [-] dang|9 years ago|reply
[+] [-] mdasen|9 years ago|reply
With an annuity, a company sells you a plan that will pay you $X/mo for a lump sum of $Y. Those that die below actuarial estimates end up paying in more than they get out while those that continue living get the profits from it.
I guess the difference is that with an annuity, you're expecting the monthly payments to be pretty close to what you're paying in over a normal life expectancy. So, a million dollar annuity with a 10-year life expectancy might net you $8,000-$8,500/mo. By contrast, a tontine would see you put in a million dollars and then maybe get $3,000 per month with a 10-year life expectancy with those that outlive others getting more money as time goes on. So, if you live long and others die, your payment might go up to $10,000 or $15,000. Is that the point of the tontine?
But why on earth would that be the future of retirement? An annuity is predictable. The risk is borne by the company selling it. With a tontine, you get unlucky and everyone lives long and you're in a bad situation. In the best case, your payments go up, but why would you want the chance at $10-15k after others have died rather than $8k predictably always?
An annuity already spreads the risk and uncertainty of life expectancy. That's the problem we're trying to solve. An annuity already lets you profit off those who die early who have paid in more than they take out - and if you live long you get more than you paid in. If you want to add the morbidity of the tontine to your retirement plan, take out life insurance policies on your friends and cash in when they die young and lose money if they live a long life. Combined with an annuity and you basically have the tontine. You get regular payouts from the annuity and you profit when your friends die via life insurance policies on them.
But looking at that, why bother with the life insurance policy? Why wouldn't you just get the annuity and have a predictable, steady income?
* You might not like companies that sell annuities and think they aren't a good investment. However, they're sound compared to some hacked-together, crowd-sourced thing that isn't backed by someone reliable with deep pockets. I won't personally buy an annuity, but they're based off spreading the risk in a conservative enough way to guarantee predictable funds (along with a reasonable profit for the company). An under-funded tontine that has people live longer than expected would simply run out of money and leave people destitute.
[+] [-] jessriedel|9 years ago|reply
The question of why annuities are relatively unpopular is an interesting social/institutional one. From talking to some financial planners, it sounds like some crooked origins gave them a bad reputation (like used cars) that they have struggled to shake. Even today there are an unusual number of scummy annuities, although it's much lower than in the past. I suspect it's because they have several moving parts, and are a bit harder for the financial unsavvy to value and compare between companies, so the market gets more swindlers.
EDIT: I previously also wrote "and the only reason this article is in the Washington Post without directly addressing these points," which is incorrect, as roymurdock helpfully pointed out.
[+] [-] scott00|9 years ago|reply
Annuities are typically sold as "risk free", but you have the risk of the insurance company becoming insolvent. A tontine's risk of everyone living longer is obvious. Since annuities have general credit exposure to the insurance company, to understand the credit risk you need to understand all of the insurers lines of business. A tontine with segregated assets doesn't depend on the other business of the manager for solvency. Some of these issues with annuities can/are mitigated by regulation, but that's another thing you have to understand in order to understand the risk. Customers understanding the risk should lead to better decisions about how much to rely on it.
Because annuities have guaranteed payments, if life expectancy increased the insurance company would continue paying out an an unsustainable rate, and when it ran out of money benefits would go from 100% to 0%. A tontine would instead reduce payments incrementally so that it's always sustainable.
Finally, people don't always make financial decisions in the way economic theory suggests they ought to. In particular, people buy way more lottery tickets than economists think they should, and way fewer annuities. If you sprinkle a little bit of lottery into an annuity it might become more marketable, leading to better average financial decision making.
[+] [-] adaml_623|9 years ago|reply
[+] [-] 6stringmerc|9 years ago|reply
As an aside, I do see the two trying out new, potentially risky synthetics called Insurance Linked Securities. Not sure it has been much of a market in the past - existed, sure, but there's a lot of sloshing Central Bank injected money looking for returns...and pension funds...and, well, everybody. Eek!
[+] [-] blowski|9 years ago|reply
There are 3 big problems with pensions. Firstly, people contribute too late, so they don't get the benefits of 50 years of compound interest and stockmarket booms. Second, many companies mismanage them - see the current Philip Green at BHS debacle in the UK for an example. Thirdly, too many people don't contribute anything at all (for whatever reason), but still need some kind of income in their old age.
I don't see how tontines get round any of these problems.
[+] [-] joshvm|9 years ago|reply
The fun part is you aren't allowed to ask explicitly how healthy the owner is, so it's a total gamble. You might be stuck paying rent to someone who lives until they're 100 or they could die in an "accident" tomorrow. So in addition to checking the walls for damp when you go round, buyers surreptitiously look for medication and disability aids. Presumably some people also go to the trouble of stalking the current owners to gauge how close they are to the coffin.
To make things more exciting, if your parents bought a house en viager and they leave it to you in their will (but the owner hasn't died yet), you're on the hook for the payments. If you don't keep them up, the owner can re-sell the house.
http://www.connexionfrance.com/explaining-the-viager-system-...
[+] [-] Someone|9 years ago|reply
"Andre-Francois Raffray thought he had a great deal 30 years ago: He would pay a 90-year-old woman 2,500 francs (about $500) a month until she died, then move into her grand apartment in a town Vincent van Gogh once roamed.
But this Christmas, Mr. Raffray died at age 77, having laid out the equivalent of more than $184,000 for an apartment he never got to live in.
On the same day, Jeanne Calment, now listed in the Guinness Book of Records as the world's oldest person at 120, dined on foie gras, duck thighs, cheese and chocolate cake at her nursing home near the sought-after apartment in Arles, northwest of Marseilles in the south of France."
[+] [-] Fradow|9 years ago|reply
That way, even in a case where there is disagreement in the family later on, parents can't be forced out of the house.
[+] [-] teekert|9 years ago|reply
[+] [-] rogov|9 years ago|reply
[+] [-] koliber|9 years ago|reply
https://en.wikipedia.org/wiki/Reverse_mortgage
[+] [-] carlob|9 years ago|reply
[+] [-] lisper|9 years ago|reply
https://en.wikipedia.org/wiki/My_Old_Lady_(film)
[+] [-] wueiued|9 years ago|reply
To give an example: state pension in my (European) country is unfair to men. We live shorter and retire latter. In average women gets 45% more money for the same contribution. As result men are avoiding state pension and use private funds.
[+] [-] distances|9 years ago|reply
Yes, women live longer, but in general have a bit smaller pension due to their time off the workforce because of motherhood, and (still) slightly lower salary levels. I don't consider this unfairness towards men any significant issue.
[+] [-] diggan|9 years ago|reply
For example, a tontine of 1000 euros with 10 members, but since the last member is in the age bracket of 20-30 instead of 30-40, they get a smaller annuity than the rest.
The Wikipedia article about tontines mentions this:
> Because younger nominees clearly had a longer life expectancy, the 17th and 18th-century tontines were normally divided into several "classes" by age (typically in bands of 5, 7 or 10 years): each class effectively formed a separate tontine, with the shares of deceased members devolving to fellow-nominees within the same class.
https://en.wikipedia.org/wiki/Tontine
[+] [-] tomp|9 years ago|reply
Does that help? I imagine there could be laws against private insurers "discriminating" based on sex (or other differences, e.g. smoker status etc.).
Some countries allow driving insurance to "discriminate" though (women pay less), so maybe they would allow pension insurance as well.
[+] [-] unknown|9 years ago|reply
[deleted]
[+] [-] ghshephard|9 years ago|reply
[+] [-] hantusk|9 years ago|reply
The companies that run the schemes, has historically been run by unions, and has historically given good yields on their wealth. The largest company of the type is state-owned and it gets money from an obligatory tax applied to all people working in the country.
The system will stop working, if politicians begins to tax these pension funds for infrastructure investment purposes, or the pension funds shifts people to financial products that prioritize individual savings/insurance.
This "tontine" system is probably the best investment, in terms of securing a good life after 65 years old, if you are among the survivors.
[+] [-] tomp|9 years ago|reply
[+] [-] q5|9 years ago|reply
Can you expand on this?
[+] [-] ja30278|9 years ago|reply
[+] [-] burkaman|9 years ago|reply
[+] [-] warfangle|9 years ago|reply
And WaPo thinks our current financial industry can do better? Sounds a lot like NINJA loans and synthetic CDOs ...
[+] [-] gwern|9 years ago|reply
"Tontine Pensions: A Solution to the Chronic Underfunding of Traditional Pension Plans", Forman & Sabin 2014 http://repozytorium.put.poznan.pl/Content/343995/Szczepanski... "Tontine Insurance and the Armstrong Investigation: A Case of Stifled Innovation, 1868-1905", Ransom & Sutch 1987 https://www.dropbox.com/s/8ubxv59z524fq5s/1987-ransom.pdf http://cyber.sci-hub.bz/MTAuMjMwNy8yMTIyMjM2/10.2307%4021222...
[+] [-] nugget|9 years ago|reply
[+] [-] repomies691|9 years ago|reply
[+] [-] orblivion|9 years ago|reply
[+] [-] fragsworth|9 years ago|reply
[+] [-] huherto|9 years ago|reply
[+] [-] prodmerc|9 years ago|reply
[+] [-] Lawtonfogle|9 years ago|reply
[+] [-] RockyMcNuts|9 years ago|reply
But insurance companies love selling insanely high-priced annuity products, and US laws around insurance, securities registration, taxes make it hard/impossible.
Regulation can be premature optimization / standardization. (or insurance company rent-seeking)
[+] [-] Shivetya|9 years ago|reply
So I guess need a new means to sell people on a lower payout? Perhaps this will also end up in a way taking over SS?
[+] [-] fiatmoney|9 years ago|reply
[+] [-] hermannj314|9 years ago|reply
I'm imagining some giant network of life insurance policies with thousands of beneficiaries on each policy and automatic rebalancing after every death.
I don't know, it just feels like a tontine (illegal in the US) can be constructed through what I assume are legal mechanisms.
[+] [-] kelukelugames|9 years ago|reply
[+] [-] lallysingh|9 years ago|reply
[+] [-] yakult|9 years ago|reply
Blockchain assassination market was a thing a few years ago, IIRC. Obama and Bernake had prices on their heads.
I wonder if these two products can be combined somehow, Highlander style.
[+] [-] allemagne|9 years ago|reply
[+] [-] theorique|9 years ago|reply
[+] [-] maxerickson|9 years ago|reply
[+] [-] unknown|9 years ago|reply
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