
Tontines may make sense despite their history of disrepute - gjvc
https://www.washingtonpost.com/news/wonk/wp/2015/09/28/this-sleazy-and-totally-illegal-savings-scheme-may-be-the-future-of-retirement/
======
lisper
Previously on HN:

[https://news.ycombinator.com/item?id=10299482](https://news.ycombinator.com/item?id=10299482)

~~~
dang
At least we can reuse that debaitified title.

------
mdasen
I don't see how this is really different from an annuity beyond getting a
bonus payment when someone dies and not being funded in a way that you're sure
the money won't run out prematurely.

With an annuity, a company sells you a plan that will pay you $X/mo for a lump
sum of $Y. Those that die below actuarial estimates end up paying in more than
they get out while those that continue living get the profits from it.

I guess the difference is that with an annuity, you're expecting the monthly
payments to be pretty close to what you're paying in over a normal life
expectancy. So, a million dollar annuity with a 10-year life expectancy might
net you $8,000-$8,500/mo. By contrast, a tontine would see you put in a
million dollars and then maybe get $3,000 per month with a 10-year life
expectancy with those that outlive others getting more money as time goes on.
So, if you live long and others die, your payment might go up to $10,000 or
$15,000. Is that the point of the tontine?

But why on earth would that be the future of retirement? An annuity is
predictable. The risk is borne by the company selling it. With a tontine, you
get unlucky and everyone lives long and you're in a bad situation. In the best
case, your payments go up, but why would you want the chance at $10-15k after
others have died rather than $8k predictably always?

An annuity already spreads the risk and uncertainty of life expectancy. That's
the problem we're trying to solve. An annuity already lets you profit off
those who die early who have paid in more than they take out - and if you live
long you get more than you paid in. If you want to add the morbidity of the
tontine to your retirement plan, take out life insurance policies on your
friends and cash in when they die young and lose money if they live a long
life. Combined with an annuity and you basically have the tontine. You get
regular payouts from the annuity and you profit when your friends die via life
insurance policies on them.

But looking at that, why bother with the life insurance policy? Why wouldn't
you just get the annuity and have a predictable, steady income?

* You might not like companies that sell annuities and think they aren't a good investment. However, they're sound compared to some hacked-together, crowd-sourced thing that isn't backed by someone reliable with deep pockets. I won't personally buy an annuity, but they're based off spreading the risk in a conservative enough way to guarantee predictable funds (along with a reasonable profit for the company). An under-funded tontine that has people live longer than expected would simply run out of money and leave people destitute.

~~~
jessriedel
This is completely correct. The only reason these sorts of silly financial
instruments are available, and the only reason you're not at the top of the
thread, is because the level of basic economic literacy is so low.

The question of why annuities are relatively unpopular is an interesting
social/institutional one. From talking to some financial planners, it sounds
like some crooked origins gave them a bad reputation (like used cars) that
they have struggled to shake. Even today there are an unusual number of scummy
annuities, although it's much lower than in the past. I suspect it's because
they have several moving parts, and are a bit harder for the financial unsavvy
to value and compare between companies, so the market gets more swindlers.

EDIT: I previously also wrote "and the only reason this article is in the
Washington Post without directly addressing these points," which is incorrect,
as roymurdock helpfully pointed out.

~~~
roymurdock
The article addresses both your point and the GP's point directly:

 _Economists have long said that the rational thing to do is to buy an
annuity. At retirement age, you could pay an insurance company $100,000 in
return for some $5,000-6,000 a year in guaranteed payments until you die. But
most people don’t do that. For decades, economists have been trying to figure
out why.

James Poterba, an economics professor at MIT who has extensively studied
American retirement, says it’s still a mystery why annuities are so unpopular.
A number of theories have been advanced — people might like to leave some
money for their children, or they might worry about medical expenses late in
life. Poterba and his colleagues have also pointed out that Social Security is
already like an annuity, promising constant payments for life.

But there’s also some evidence that people just irrationally dislike
annuities. As behavioral economist Richard Thaler wrote in the New York Times:
“Rather than viewing an annuity as providing insurance in the event that one
lives past 85 or 90, most people seem to consider buying an annuity as a
gamble, in which one has to live a certain number of years just to break
even.”

Here is where tontines come in. If people irrationally fear annuities because
they seem like a gamble on one's own life, history suggests that they
irrationally loved tontines because they see tontines as a gamble on other
people's lives._

I agree that financial literacy in the US is low, and the basic
accounting/finance classes should be required at the high school level, but
this article is good and draws upon a decent amount of actual economic
literature. I recommend reading it to the end.

~~~
iumtuip2001
I'd like to put forward another possible reason why someone might opt to not
get an annuity...

If you are financially savvy, or can pay someone else to be, does it not make
more sense to invest your money yourself? There are a number of "too big to
fail" companies, like GM, and Wells Fargo, that offer dividends. If you
composed a portfolio of high dividend, stable, stocks... Could you
theoretically have a "guaranteed" monthly income AND the ability to liquidate,
in the event of an emergency?

~~~
greeneggs
> If you composed a portfolio of high dividend, stable, stocks... Could you
> theoretically have a "guaranteed" monthly income AND the ability to
> liquidate, in the event of an emergency?

No. You can buy an annuity, or US Treasury bonds, but guaranteed high returns
don't exist, and adding in a liquidity requirement doesn't help.

Note that GM declared bankruptcy in 2009. Even if it is still "too big to
fail," that doesn't mean investors can't lose all their money.

~~~
iumtuip2001
I never claimed guaranteed high returns. An annuity doesn't guarantee you
"high" monthly income. It guarantees you AN monthly income.

My comment was to address the question regarding why more people don't use
annuities, and I'm not sure your response counters that.

Regarding GM, yes, I'm aware they went bankrupt. But correct me if I'm wrong -
Investors didn't lose their shares? The government bailed them out, and
they're operational today. That's what I mean by "too big to fail".

~~~
greeneggs
> In the case of GM, investors who held shares of the company before its
> reorganization saw their equity holdings cancelled in March, 2011. Per the
> company's reorganization plan, they did not receive any shares of the "new"
> GM.

[http://www.fool.com/investing/general/2016/02/23/what-a-
corp...](http://www.fool.com/investing/general/2016/02/23/what-a-corporate-
bankruptcy-means-for-shareholders.aspx)

------
joshvm
My favourite example of death related investment is the French housing system,
_viager_. You can buy the rights to a house, but you only get the deeds once
the current owner dies. In return for paying the current (often elderly) owner
a modest monthly rent plus a lump sum, you get the house for a low price (e.g.
50% off). The lump sum is a fraction of the discount price and the rent is,
keeping it morbid, based on French life expectancy.

The fun part is you aren't allowed to ask explicitly how healthy the owner is,
so it's a total gamble. You might be stuck paying rent to someone who lives
until they're 100 or they could die in an "accident" tomorrow. So in addition
to checking the walls for damp when you go round, buyers surreptitiously look
for medication and disability aids. Presumably some people also go to the
trouble of stalking the current owners to gauge how close they are to the
coffin.

To make things more exciting, if your parents bought a house _en viager_ and
they leave it to you in their will (but the owner hasn't died yet), you're on
the hook for the payments. If you don't keep them up, the owner can re-sell
the house.

[http://www.connexionfrance.com/explaining-the-viager-
system-...](http://www.connexionfrance.com/explaining-the-viager-
system-10211-news-article.html)

~~~
Someone
If you're unlucky, you end up with
[http://www.nytimes.com/1995/12/29/world/a-120-year-lease-
on-...](http://www.nytimes.com/1995/12/29/world/a-120-year-lease-on-life-
outlasts-apartment-heir.html) (1995):

 _" Andre-Francois Raffray thought he had a great deal 30 years ago: He would
pay a 90-year-old woman 2,500 francs (about $500) a month until she died, then
move into her grand apartment in a town Vincent van Gogh once roamed.

But this Christmas, Mr. Raffray died at age 77, having laid out the equivalent
of more than $184,000 for an apartment he never got to live in.

On the same day, Jeanne Calment, now listed in the Guinness Book of Records as
the world's oldest person at 120, dined on foie gras, duck thighs, cheese and
chocolate cake at her nursing home near the sought-after apartment in Arles,
northwest of Marseilles in the south of France."_

~~~
hvm
So she lived in a nursing home for 10 years but still didn't let the guy live
in the apartment? I know she had the right to it but come on...

~~~
outside1234
He has no rights to the house until she dies. This is perfectly within her
contract with him.

~~~
coldtea
Contract rights have nothing to do with the morality of this...

~~~
biot
The morality is already clearly established: in exchange for a very small
monthly sum, you get the property when the owner dies. The property may be a
dedicated rental unit already, so whether or not the owner lives there has no
bearing. So it's not just _within_ the contract, it's the _purpose_ of the
contract.

~~~
coldtea
> _The morality is already clearly established: in exchange for a very small
> monthly sum, you get the property when the owner dies._

That's, again, the contract. Seems some people can't tell between legal and
moral, unless we talk about the 70s and segregation or something like that...

~~~
Someone
It is a lottery with two participants that willingly took part in it. She won
big, but if she had died the day after the contract was signed, he would have
won big: he would have gotten the house for about $500. Would you suggest he
should have paid her inheritance a lump sum if that would have happened?

~~~
coldtea
I don't see much harm in "winning big" over somebody who just died. Being
dead, it's not like she would have missed the money.

On the other hand, having someone pay tons of money and then die without
anything to show for it, I do see, even if he "willingly signed into it".

There's also a threshold over which it should just be handed over. That such a
threshold wasn't in the contract doesn't make it any less odious.

~~~
Someone
Her heirs would have disagreed. Consider the case where your mother owns a
house and 'sells' it for $500 just before dying.

Also, I expect people buying such rights are generally well-off, and the
people selling it to be relatively poor. After all, the buyer must be able to
pay money on a house they cannot live in for an indeterminate period, and the
seller typically chooses this construct to be ensured of both a roof over
their head and money to live from for one's entire life, no matter how long
that is.

The odds in this lottery get better every month for the buyer, so, assuming
that the buyer can afford to buy into this, they should have no reason to want
to get out of this.

------
wueiued
There is one problem with that. People can predict their own life expectancy.
People who expect to live shorter will avoid such scheme.

To give an example: state pension in my (European) country is unfair to men.
We live shorter and retire latter. In average women gets 45% more money for
the same contribution. As result men are avoiding state pension and use
private funds.

~~~
distances
In Finland this is solved by it not being possible to avoid state pension. You
can collect your additional stash, but if you're getting a salary, you _will_
be paying to the pension fund.

Yes, women live longer, but in general have a bit smaller pension due to their
time off the workforce because of motherhood, and (still) slightly lower
salary levels. I don't consider this unfairness towards men any significant
issue.

~~~
caseymarquis
That's an excellent point. It actually helps balance existing inequality.
Maybe not 'ideal', but fairly practical.

~~~
Chris2048
No! You don't balance unrelated, uncorrelated things.

Do we now abandon efforts to reduce gender roles, or pay-gap differences
because that would upset the balance. Are women who don't become mothers owed
a greater pension?

Refusing to fix one problem, due to some illusion of karma is ridiculous.
Should we also abandon cancer-cures out of concern for those who are short-
lived by other causes?

~~~
hermannj314
Can you elaborate? Why is it wrong to base individual pensions payments on
individual contributions? I'm not following.

Are you just saying it wrong to lump people into two different groups
arbitrarily? Like we don't base social payments on two arbitrary cohorts like
"people over/under 68 inches of height", so why would we base it on gender?

~~~
Chris2048
The original poster was implying that other inequalities wrt gender "balanced
out" the equality wrt pensions and lifespan. I was rejecting arbitrarily
linking two unrelated things (problems), and consider them as cancelling each
other out.

The poster also stated "In Finland this is solved by it not being possible to
avoid state pension" so this _isn 't_ basing individual pensions on individual
contributions, because much like life insurance, and individual pension would
adjust for life-expectancy, whereas I believe the Finnish system is a flat
rate wrt gender (this is what I inferred?).

The point about arbitrary groupings is a good one, but it will fall on deaf
ears in places like the US, where established groupings have high political
importance.

------
hantusk
A hybrid tontine system is the most common way to save for your pension in
Denmark. It is not regarded as sleazy.

The companies that run the schemes, has historically been run by unions, and
has historically given good yields on their wealth. The largest company of the
type is state-owned and it gets money from an obligatory tax applied to all
people working in the country.

The system will stop working, if politicians begins to tax these pension funds
for infrastructure investment purposes, or the pension funds shifts people to
financial products that prioritize individual savings/insurance.

This "tontine" system is probably the best investment, in terms of securing a
good life after 65 years old, if you are among the survivors.

~~~
tomp
Wait, do the payments actually increase as more people die? If not, it's not a
tonine, just regular pension insurance.

~~~
amag
Well, the money invested by the deceased has to go somewhere..

I'm not sure how the system works in Denmark but in Sweden you choose whether
to give the remaining pension to your family or to have it split among the
other people in the pension fund _that also opted for the split_.

------
ja30278
"There was rampant shadiness back in the day" ...this is an actual quote from
a major paper? Maybe I'm just getting old, but this seems like unbelievably
sloppy language for someone being paid to write.

~~~
burkaman
This is a blog/column. I'm not sure this article appeared in the actual paper.

------
warfangle
> There was rampant shadiness back in the day, including countless swindles
> perpetrated on the public, both related and unrelated to the tontine.
> Bribery of newspapers and politicians was also routine, as was embezzlement
> and plain theft. Magazine exposés riled the public with stories of secret
> payments and secret blackmail of public officials.

And WaPo thinks our current financial industry can do better? Sounds a lot
like NINJA loans and synthetic CDOs ...

------
gwern
Further reading:

"Tontine Pensions: A Solution to the Chronic Underfunding of Traditional
Pension Plans", Forman & Sabin 2014
[http://repozytorium.put.poznan.pl/Content/343995/Szczepanski...](http://repozytorium.put.poznan.pl/Content/343995/Szczepanski_Brzeczek_Gajowiak_Systemy_zabezpieczenia_spolecznego_wobec_wyzwan_demograficznych_i_rynkowych.pdf#page=55)
"Tontine Insurance and the Armstrong Investigation: A Case of Stifled
Innovation, 1868-1905", Ransom & Sutch 1987
[https://www.dropbox.com/s/8ubxv59z524fq5s/1987-ransom.pdf](https://www.dropbox.com/s/8ubxv59z524fq5s/1987-ransom.pdf)
[http://cyber.sci-
hub.bz/MTAuMjMwNy8yMTIyMjM2/10.2307%4021222...](http://cyber.sci-
hub.bz/MTAuMjMwNy8yMTIyMjM2/10.2307%402122236.pdf)

------
nugget
It seems to me that the middle/upper middle classes moving from defined
benefit (old school pension plans) to defined contribution (401k plans) was a
chance for them to build up (and learn to sustainably manage) real
capitalistic wealth that could be passed down to their kids. It's not a
stretch to predict that to the extent the vast majority of these folks store
their wealth in annuities, or similar plans that effectively evaporate upon
death, the result will be much smaller estates/inheritances which would
reinforce or even worsen the wealth inequality that exists today.

------
repomies691
Couldn't this whole scheme be developed in totally decentralized fashion using
bitcoin, ethereum or similar? Would be quite a good idea.

~~~
orblivion
I was about to say something about needing an enforcement body of some sort.
But then I realized you could literally use a dead man switch.

~~~
fragsworth
Couldn't the members could write a script (or even just have a friend) that
keeps them "alive" forever?

~~~
allemagne
Maybe using some form of biometrics. Or also hiring some sort of private
investigator who would keep track of everyone in the tontine primarily via
social media and sometimes by physically checking on them.

I'd imagine it would be impossible to get around this problem completely
though.

------
huherto
I don't think I would like to invest on something called "tontine"; "tonto"
means dummy in Spanish. White Snow's Dopey is called "tontin" in Spanish. Lone
Ranger's friend Tonto had to be renamed "Toro" as in bull.

~~~
prodmerc
I thought that Tonto's name was the joke/point?

------
Lawtonfogle
My biggest concern is the direct benefit off the death of others causing a
perverse incentive to kill. There are people who will mug and risk killing you
over the money in your wallet, so I could definitely see people being killed
over the money in one of these.

------
RockyMcNuts
Makes sense, it's like crowd-sourced life insurance. -
[http://blog.streeteye.com/blog/2015/09/tontines-strange-
name...](http://blog.streeteye.com/blog/2015/09/tontines-strange-name-great-
idea/)

But insurance companies love selling insanely high-priced annuity products,
and US laws around insurance, securities registration, taxes make it
hard/impossible.

Regulation can be premature optimization / standardization. (or insurance
company rent-seeking)

------
Shivetya
Damn, didn't take long to get to the real reason. Governments are scared
shitless about the public pension default issue. The hundreds of billions of
unfunded liability with regards to public employee pension payments has been
well known and no good solution has been found. From straight up state
employees to those working for transit authorities. The numbers of truly
staggering.

So I guess need a new means to sell people on a lower payout? Perhaps this
will also end up in a way taking over SS?

------
fiatmoney
Pension funds in many cases operate similarly; their finances improve if
beneficiaries die early, and in some cases they are required to pay out
surplus returns above a certain level. The difference seems to be that
pensions operate continuously (ie, they'd only see a demographic effect on
payouts if there were a global decline in life expectancy) rather than on a
defined batch of customers.

------
hermannj314
Can you construct an insurance instrument that behaves like a tontine without
breaking the law?

I'm imagining some giant network of life insurance policies with thousands of
beneficiaries on each policy and automatic rebalancing after every death.

I don't know, it just feels like a tontine (illegal in the US) can be
constructed through what I assume are legal mechanisms.

------
kelukelugames
The title sounds like an ad for local news. Please change the title to what it
is.

------
lallysingh
So, it's a shame you can't do this over a blockchain, to verify honesty of the
payouts -- no way to make sure that someone's still alive.

~~~
yakult
The government keeps legally meaningful records of deaths. It can be done.

Blockchain assassination market was a thing a few years ago, IIRC. Obama and
Bernake had prices on their heads.

I wonder if these two products can be combined somehow, Highlander style.

------
theorique
The old British comedy "The Wrong Box" tells a story about a tontine and its
consequences.

~~~
maxerickson
The Simpsons did it in _Raging Abe Simpson and His Grumbling Grandson in "The
Curse of the Flying Hellfish"_.

~~~
FireBeyond
And for that matter, in Archer, too. Woodhouse and his army buddies set up a
tontine.

------
andrewfromx
of course, www.tontines.com is a landing page to godaddy

------
cloudjacker
I like reading about old financial products because the conditions can be
recycled as novel

------
wueiued
... and fuck men who live shorter.

~~~
dang
Please don't post this sort of angry unsubstantive comment to Hacker News.
It's destructive of the spirit of the site, which is intellectual curiosity.

We detached this comment from
[https://news.ycombinator.com/item?id=11861314](https://news.ycombinator.com/item?id=11861314)
and marked it off-topic.

------
lmm
She probably rented it out. Socialist Europe tends to frown on property
standing empty, but there's no reason the guy should've got the rental income.

~~~
dang
Drive-by name-calling ruins HN threads, as seen below. Please don't toss
matches into political petrol on this site.

We detached this subthread from
[https://news.ycombinator.com/item?id=11861319](https://news.ycombinator.com/item?id=11861319)
and marked it off-topic.

~~~
lmm
I wasn't name-calling, I was describing. I'm a socialist and a European. The
government of France is literally the socialist party.

~~~
dang
Fair enough. The phrase doesn't hop contexts so successfully.

------
imron
Everything old is new again.

------
retrogradeorbit
"a modern tontine would be particularly suited to soothing the frustrations of
21st-century retirement"

You know what would be even better? Higher interest rates.

~~~
tinkerrr
Interest rates in most of the developed world have been on the decline for
almost 30 years. There is no way to just magically increase interest rates in
the market. Contrary to the popular belief, the Fed doesn't set interest rates
in the economy, and it has even lower power over long-term interest rates [1].
Also, you're interested in interest rates above and beyond inflation, i.e.
'real' rates of return, not nominal.

[1] [http://aswathdamodaran.blogspot.co.uk/2015/09/the-fed-
intere...](http://aswathdamodaran.blogspot.co.uk/2015/09/the-fed-interest-
rates-and-stock-prices.html)

~~~
retrogradeorbit
I disagree with almost everything you said here. And a blogspot link does not
prove your point. It's just someone's opinion.

Interest rates aren't _directly_ set by central banks, but of course they
influence the cost of borrowing for commercial banks. That's why when central
bank rates fall, commercial rates fall too. And visa versa. And why when
commercial banks don't lower rates in turn there is political pressure to
"pass on the savings".

As for longer term rates, they do have power over that by selling one maturity
of instrument for the purchasing of another maturity. This has colloquially
been called "operation twist".

I am fully aware of real vs nominal. But I'm curious. How do you know what
real rates are if you do not have a consistent, repeatable, uncorrupted
measure of inflation?

~~~
lgieron
The central bank can set their rate at 1000%, but if no one has any potential
investments that can yield 1000%+ returns, companies just won't borrow money.
In other words, no one will be getting 1000% returns on their savings. On the
other hand, if you'd be willing to lend your savings at say 5%, you might find
action.

~~~
mywittyname
People invest in the CB and earn their guaranteed return. This would drive
inflation as bonds mature and soon investment returns would eventually look
something like (1000 + $realReturn)%.

Maybe not at such an extraordinary rate, but Volcker raised rates to 10-21% in
the early 80s and US-based stock returns during that era were substantially
higher than at any other time.

[http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...](http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html)

Referring to that, in the 16 years after the 10 T-Bond return hit a peak of
33% in 1982, stocks yielded over 30% in six separate times. In the next 16
years, from 1999 to 2015, it's done that once, 8 years after a -30% return
from the crash of 2008. The S&P also yielded 30+% only twice in the 16 years
before 1983.

It's not concrete evidence, but it does suggest some relationship between
central bank yield and stock returns.

