Before Social Security, pensions and IRAs, there was a popular retirement scheme called tontines —a type of investment pool where members paid a lump sum upfront and received annual dividend payments for life.
At first glance, tontines look a lot like annuities, but there’s a macabre twist. Members buy into a tontine with a group of investors, and as investors die off, their share of the payout is divvied up among the remaining survivors. The longer you live—and the fewer fellow investors who remain—the larger your annual payment. The last investor standing collects the entire dividend. When he or she dies, the arrangement is terminated.
Rise and Fall of the Original Tontine
Because payments increase as the number of investors decreases, the surviving investors quite literally profit off other people’s deaths—a feature many would consider rather ghoulish. Still, in the early 1900s, at the height of their popularity, tontines represented almost two-thirds of the insurance market in the U.S., accounting for more than 7.5 percent of the nation’s wealth. By 1905, there were an estimated 9 million active tontine policies—in a country of just 18 million households.
The success of the tontine in the U.S., however, was to be short-lived. Following an embezzlement scandal involving the insurance industry, tontines fell largely out of favor with the public and were soon banned in several states. Pop culture only amplified the tontine’s already odious reputation: Agatha Christie, Robert Louis Stevenson and P.G. Wodehouse all wrote stories about tontine participants conspiring to kill one another to lay claim to the big payoff.
While tontines are still outlawed, a growing number of financial advisors and academics think it may be time to take a second look at these financial arrangements. One such academic is Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business in Toronto, who would like to see tontines make a comeback.
Milevsky considers tontines attractive because they provide the regular income of an annuity and even more income for living members, thanks to the tontine’s structure and relatively low costs (which help produce higher yields than annuities). “I think that the yield element is an important component of why we would like to bring them back,” Milevsky told the New York Times.
Tontines may also offer a solution to longevity risk—the danger that you’ll outlive your money. “Longevity risk in society is a big threat, and tontines could be part of the solution,” Bruno Caron, an actuary at insurance-rating firm A.M. Best in Oldwick, N.J., was quoted as saying in the same NY Times article. As a tontine member you collect payments for the rest of your life, and the longer you live, the more money you collect, as other members pass away and shares are redistributed among surviving members.
A Viable Retirement Solution?
Advocates say that with automation and developments like blockchain technology, today’s tontine could have something that was missing in previous versions: transparency, and, with it, less likelihood of fraud. The idea is that instead of something that belongs hidden in the pages of a murder mystery, the modern version of the tontine could be a viable way for people to finance their final years.
Tontines could even provide a safer and more affordable way for companies to revive the pension (interestingly, the fall of the American tontine in the early 20th century has been credited with the rise of the corporate pension). “This might be the iPhone of retirement products,” Milevsky told the Washington Post.