An argument to bring back a contractual “lottery” for retirement savings


Have you ever heard of a tontine? It is something like a financial contract that collects and invests money from a group of people.

There is a catch though: the people involved will never see their money refunded, although they will usually get returns on their investment, and ultimately all that money will go to the last person who survives.

It’s like a lottery, but to see who lives the longest. It’s not surprising to see it used as a murder plot in fictional media, like the 1966 movie “The Wrong Box” or in an episode of The Simpsons. But tontines were used in real life in the United States until the turn of the 20th century, when their use was more or less banned.

Some economists argue that a tontine could be used positively in retirement plans. Chris Farrell, principal contributor to Marketplace economics, joined Marketplace Morning Report host David Brancaccio to discuss the merits of reinstating the tontine contract in the United States.

Below is an edited transcript of their conversation.

Chris Farrell: So this film, “The Wrong Box” is about a tontine, this financial contract where a certain sum of money is set aside and, moreover, we cannot recover the money, and it is invested for the benefit of a group of people. Now here’s the twist: When some people die, their share of the fund goes to the survivors of the group. So, with periodic interest payments, distributed only to survivors, the longer you live, the higher the payment. So tontines could provide income for group members who, you know, are living longer than expected.

David Brancaccio: Why have these tontines fallen out of favor in the United States?

Farrell: OK, so they were very mundane. And I still love it, that a tontine funded the construction of the original New York Stock Exchange house in the Tontine Coffee House. Life insurance tontines were popular in 19th century America, but it was a very lightly regulated product and attracted all kinds of scams and abuse from promoters. So in the early part of the 20th century, rather than better regulation, it was essentially banned.

BrancaccioQ .: So now a financial arrangement that has been, as you say, abused and looks disgusting should be resurrected to help current retirees perhaps manage their income in their old age? Explain, Chris.

Farrell: Hey, it’s finance. OK, no, seriously, that’s what retirement experts argue in the Brookings Institution’s publication, “Wealth After Work.” And finance professor Moshe Milevsky, he’s also released a book, “King William’s Tontine”, and he’s advocating for resurrecting the tontine for retirement savers. So there are a lot of twists and turns to create the actual financial product, but let’s take the 30,000-foot perspective. First, it addresses the fear of outliving your assets. The design is more transparent than Annuities, which is a competitive product. They are cheaper for the client than annuities for a variety of reasons. And finally, and probably the biggest draw, they offer the prospect of higher returns, depending on when the people in the pool die. And regulators are confident they could possibly prevent a lot of abuses.

Brancaccio: Okay, a perfect plan. All you have to do is live longer than everyone else. Does anyone use tontines this way here in the 21st century?

Farrell: Well, former Swiss Air employees are taking advantage of the untimely deaths of their colleagues and you have also had thoughts on the tontines affecting retirement savings plans in places like Sweden and Japan. So, you know, the tontine exists and it might be a partial solution to the fear of outliving your assets.


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