Tontines are coming, someday.
That’s my hopeful takeaway from Tom Verde’s “When Others Die, Tontine Investors Win” in today’s New York Times.
Tontines were popular for a few hundred years but became toxic after scandals in the late 19th century. The concept is now being revived as a retirement income solution.
Unfortunately, Verde uses a traditional tontine to explain how tontines work. The investment pool generates a fixed total income, which is divided equally among the survivors. As pool members die, the survivors receive an increasing income, and a few lucky members enjoy a windfall. This looks like gambling and an invitation to murder.
In a 2015 book, King William’s Tontine: Why the Retirement Annuity of the Future Should Resemble Its Past, Moshe A. Milevsky described a different kind of tontine that is designed to work like a single-premium immediate annuity. If the pool members survive as expected and if the pool investments perform as expected, the income payments will remain level. If the actual mortality and investment experience differs from the assumptions, the income payments will be adjusted up or down.
The goal of this type of tontine is to provide a reasonably stable lifetime income without the required costs of commercial insurance products for guarantees, capital and regulation.
In the “The Family as an Incomplete Annuities Market” (Journal of Political Economy, February 1981), Laurence J. Kotlikoff and Avia Spivak argued that even small families can create risk-sharing agreements that partially replace commercial income annuities, leaving a greatly reduced need for these annuities.
Tontines are the next step up in scale of risk sharing. Simulations demonstrate that you can achieve a surprisingly high level of income stability with a pool of just a few hundred participants.
Ongoing research is addressing technical aspects of tontines, such as how to provide equitable risk sharing across heterogeneous groups. However, as Verde points out, uncertainty about regulation and income tax treatment also needs to be addressed.
This is one area where regulation is hindering socially desirable innovation.