Live Long And Prosper: Reviving An Idea For Income In Old Age
Some financial experts want to introduce a tool to help people plan for retirement better. It's a very old tool, discarded and almost forgotten. But for centuries it was used to build bridges, fancy meeting halls and to provide people with income in their old age. That is, before it was undone by fraud and ghoulish portrayals in popular culture.
The tool is called a tontine. A group of people pool their cash and pitch in together to buy into an unusual sort of betting club. They're buying a bond that makes regular payments, or dividends. Each individual bets on how long he or she will live.
"That dividend is going to be distributed to all the people that purchased this bond with the minor proviso that you have to be alive to get those dividends," says Moshe Milevsky, a finance professor at the Schulich School of Business at York University in Toronto who has written extensively about tontines.
The name tontine, Milevsky says, is derived from a Neapolitan banker, Lorenzo de Tonti, who lived in the 17th century.
"He suggested this to Louis the Fourteenth as a way to raise money for the government to fight its wars, pay for his mistresses and finance its deficits and so on and so forth," Milevsky says.
Now let's get back to the people who invest in the tontine and that proviso that Milevsky just mentioned. It's an important one. You have to be alive to collect.
"As people start to pass away in this group, the survivors are getting payments that are increasing," Milevsky says.
You see where this is going. Certain participants in the tontine are doubly unlucky. They die early and they collect less money. The lucky ones who live a long time — their earnings just keep growing. For centuries, before Social Security, before 401(k) plans, when hardly anyone had a pension, the tontine was a way to earn income in old age.
"Historians have documented that by the early 20th century it was the most popular investment held by U.S. households," Milevsky says. "So it became extraordinarily popular 120, 130 years ago."
Tontines in the U.S. were offered through insurance companies. And the tontines were pretty dodgy. "It ended up falling apart when the insurance companies paid out less than they said they would," says Kent McKeever, the director of the library at Columbia University law school. He's written a short history of tontines.
In 1905, New York state launched an investigation. And that was basically the end. The tontines were banned. Maybe worse was the beating they took in popular culture. In novels and movies, a standard tontine story line emerged.
"The person who thinks they're going to benefit by everyone else dying starts killing everyone else," McKeever says. Tontines have been the subject of murder mysteries as well as comic spoofs, a plot device employed by the novelist Robert Louis Stevenson as well as the makers of The Simpsons, M*A*S*H, and the animated spy comedy Archer.
The tontine — a lurid scheme that inspires the worst human impulses. At least that's how it's usually portrayed. So why would finance professor Moshe Milevsky say this?: "I believe yes it has a role to play in financing retirement."
He says more people today are living well into their 90s or even past 100 — 30 years or more after they stop working.
"I think this is a really good way to protect yourself against living much, much longer than your resources," such as a 401(k), Milevsky says. He says a 21st-century tontine would be a small part of someone's investment portfolio — a bet on longevity. It would be computerized. It would include a large group of people putting in small sums of money. With none of the creepy aspects of earlier tontines.
"We could anonymize it," he says. "Technology today would be able to make it so you don't quite know who's in the pool with you. So you wouldn't quite know when you read the obituaries, hey, my tontine payment is going to go up this month."
Milevsky also makes the case that products most of us already use – life insurance and health insurance – rely on predictions about how long people in a large group will live, or stay healthy. Making educated bets about mortality is fundamental to insurance. "What I'm trying to say let's make this a little more transparent," Milevsky says.
He says a modern tontine wouldn't have the expenses of similar products sold today by insurance companies. "You cut out the middleman. So the way I like to think of it, it would be the Uber of retirement income." Milevsky says he's not alone here. He says about a dozen other academics also want to bring tontines back from the dead.