Some lawyers see merit in once-disgraced tontines
Some lawyers and economists say once-popular tontines might make sense as a retirement vehicle, despite a history that led states to ban their use.
Tontines were at their peak around 1900, but a series of scandals led to their downfall, the Washington Post reports. The story defines tontines this way:
“Tontines, you see, operate on a morbid principle: You buy into a tontine alongside many other investors. The entire group is paid at regular intervals. The key twist: As your fellow investors die, their share of the payout gets redistributed to the remaining survivors. In a tontine, the longer you live, the larger your profits — but you are profiting precisely off other people’s deaths.”
Corporate pensions took the place of tontines, but now such pensions are on the decline and retirees risk outliving their savings. Annuities could guarantee security, but they are unpopular. One theory is that annuities are shunned because people see them as a gamble on their own life that requires them to live a certain number of years to break even.
Tontines, on the other hand, could be viewed as a gamble on other people’s lives. It is like an annuity, without the middleman and without the expense of administering it.
A recent article in the University of Pennsylvania Law Review suggests that pension groups such as the California Public Employees’ Retirement System could adopt payouts based on the tontine model. If people die sooner than expected, their shares could be redistributed to the remaining pensioners. If people die more slowly than expected, pension checks would be slightly smaller.
“We believe that the time has come to revive tontines as a way of providing reliable, pension-like income for retirees,” write the authors, University of Oklahoma law professor Jonathan Barry Forman and consultant Michael Sabin.
Moshe Milevsky, a finance professor at York University of Toronto, is backing tontines in the private market, competing against annuities and longevity insurance. “This might be the iPhone of retirement products,” he tells the Washington Post.
