
Tontines may make sense despite their history of disrepute - lisper
http://www.washingtonpost.com/news/wonkblog/wp/2015/09/28/this-sleazy-and-totally-illegal-savings-scheme-may-be-the-future-of-retirement/
======
patio11
Tontines don't solve the elephant in the room, which is that people are
substantially undersaving for retirement.

There exists no financial innovation which will provide for fully-funded
retirements for 100 retirees each having $100k to invest. (Sourced below.)
There is no way to slice that pool of $10 million in such a way that it
increases the NPV of it to more than $10 million. It's underfunded by _a
factor of 10_.

>> The agency found the median amount of those savings is about $104,000 for
households with members between 55 and 64 years old[.]

[http://www.cnbc.com/2015/06/03/most-older-americans-fall-
sho...](http://www.cnbc.com/2015/06/03/most-older-americans-fall-short-on-
retirement-savings.html)

~~~
aianus
> There exists no financial innovation which will provide for fully-funded
> retirements for 100 retirees each having $100k to invest.

You could start a retirement community in a third world African country where
costs are lower. $100k is stretching it but $250k and they'd be fine for the
rest of their lives.

~~~
Apofis
Ship old people to Cuba, now that we're removing restrictions. Cuba will be
the new Florida.

~~~
tsotha
Why not? Florida was the new Cuba after the revolution.

------
derekp7
This sounds a lot like longevity insurance (a form of deferred annuity) which
from what I've read is available now. Normally when you retire (with a decent
size 401k or IRA balance), you have to take a guess at how long you will live,
and draw it down at a rate that will last you. The safe bet is to guess you
will live to 100, and that the fund will grow at 4-5%, but that may not leave
you with enough annual income.

The idea of longevity insurance, is you buy something like a $50K policy at
age 65, and the insurance company will pay you $70K a year for life after you
turn 85. So you buy the policy up front, and adjust your 401k withdrawals so
that fund runs out a age 85. Then the annuity takes over after that.

~~~
gwern
It doesn't directly compare with longevity insurance, but to me it sounds like
all the advantages against annuities would carry over:

> Annuities are expensive to administer, and so their payouts are rather low.
> The costs stem in part from paying the insurance company to shoulder all the
> risk. To guarantee it can make good on all its annuity contracts, the
> insurer has to set aside a lot of money in reserve — just in case people
> live longer than expected, or in case the market crashes. A tontine does
> away with all that overhead, so more money is available to the retirees. By
> Milevsky's calculations, a tontine might offer a 10 percent to 20 percent
> premium over an annuity — a bigger pie to be divided among the group. The
> downside is that retirees would see their payouts fluctuate depending on the
> various times other people in the tontine group died. Compared to an
> annuity, a tontine abandons certain payouts for much higher returns...Such a
> system would be cheaper to operate and would always, by definition, be fully
> funded. The funny thing is that some retirement systems already carry out a
> version of that process. As Milevsky documents in his book, there is
> "tontine thinking" embedded in various national pension schemes, and even in
> a product offered by TIAA-CREF in the United States. These plans adjust
> payments according to mortality. They just don't use the word tontine.

~~~
derekp7
Just for reference (and to see if longevity insurance is a good deal), I ran
some numbers using the SSA actuary tables (at
[http://www.ssa.gov/oact/STATS/table4c6.html](http://www.ssa.gov/oact/STATS/table4c6.html)).
I ran a few scenarios as follows, assuming no administrative overhead:

1) If everyone in a given pool puts in $50k at age 65, the surviving members
can withdraw $18k per year starting at age 85 -- any more and the fund runs
dry.

2) If the fund is invested at an interest rate of 2%, they can withdraw $30k
annually starting at 85 without the fund running out.

3) At 5% interest, that number goes to $62k.

For comparison, according to a random article on longevity insurance, Met Life
quotes a payout of $15k per year (at 85) if $50k is invested at age 65.

Also, as another point of reference, if you invest 50k at 65 and get 5%
returns, and withdraw 13k staring at 85, you will have enough to last you till
age 96. So the longevity quote above really isn't that great of a deal.

------
jessriedel
Had to read past many paragraphs of historical filler and other teaser trash
to get to the meat:

> 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. ...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.

Right, so the answer is completely known, and now we're just speculating on
what weird financial device will best play to people's economic ignorance.
Luckily, the author sounds almost as confused, since you couldn't have a
handle on economics and write this:

> Retirees often object to annuities because they worry about not living long
> enough to make the money back. This is the nightmare scenario: If someone
> dies the day after she buys an annuity, the insurance company walks away
> with the cash scot-free. In a tontine, that money passes on to help fund
> other people's retirements.

~~~
linkydinkandyou
Another reason people are reluctant to use annuities is they don't trust the
companies selling them to remain in business for 10 years or more....

~~~
jessriedel
Not sure about folks' actual reasoning, but I don't think that can be
consistently squared with the popularity of life insurance. "The most common
terms are 10, 15, 20, and 30 years."

~~~
linkydinkandyou
Yeah, but most people don't "expect" to collect term life. And even if it does
pay, you'll be dead!

You do expect to collect your annuity payments.

~~~
mikeash
Also, if your life insurance company goes under, then you can just buy a new
policy from a different company. You only get screwed if you die after the
insurance company goes under but before you can buy a new policy. With an
annuity, if your insurance company goes under then you are capital-S Screwed.

------
krisroadruck
Isn't this basically exactly how social security works? The longer you live
the more profit you receive? It's why social security has been repeatedly
called sexist. Women tend to live longer, thus draw more social security, yet
men tend to contribute more in social security taxes during their working
years than women. A double loss prospect for men and a double win for women.

~~~
panic
How is what you describe sexist? From your perspective, what would be a non-
sexist way of paying out social security?

~~~
aianus
> what would be a non-sexist way of paying out social security?

Increase the payroll deductions for women seeing as how they live longer, same
way my car insurance costs more than if I were a woman.

~~~
AnimalMuppet
Your car insurance would cost more if you were a woman? Citation needed.

My impression is that most car insurance costs more for a man, because men
tend to be more aggressive behind the wheel, and that translates into a higher
incidence of accidents. At least, that's certainly the case for young drivers.

I attempted to prove it with a quick quote from Progressive, but they want a
real name so they can check credit history, and I wasn't willing to give it to
them. So I can't (easily and quickly) prove that you're wrong, but I'd like to
hear why you think you're right.

~~~
jff
> my car insurance costs more _than_ if I were a woman.

You missed a very important word.

~~~
AnimalMuppet
Ah, I see. My error.

------
shalmanese
I wonder what effect tontines would have on healthy behaviors. Traditionally,
we've found that very little moves the margin on getting people to enact
healthy behaviors but perhaps the motivation of beating your peers for
financial gain might actually move the needle.

------
saretired
The idea is you give up return of principal for a bet on the NPV of coupons
during your life. Which is a gamble, and quite tidy too: nothing to leave to
one's heirs for all but one of the participants[1]. But also a gamble on a
particular pool of assets. "At retirement, you and a bunch of other people
each chip in $20,000 to buy a ton of mutual funds or stocks or whatever." But
these "whatevers" are volatile assets that will produce losses in some years--
the opposite of the usual advice to lower volatile asset holdings at
retirement. So now it's a double bet: first on NPV/longevity, and second on
the health of the underlying assets. Exactly the kind of thing that Wall St
would love to sell to the public.

[1] All of the underlying assets being transferred to the last survivor is one
type of tontine; in another, certain to be a favorite of Wall St., the
underlying would be transferred to the plan manager after the death of the
last participant.

------
boxy310
> But the new urban factory jobs were completely different. “These were often
> debilitating, strenuous occupations,” Sutch says. “People couldn't work in
> their old age.”

Isn't the problem with post-industrial societies that many office workers
_are_ capable of working for much longer? While life expectancy is definitely
going up, it's growing unequally, with the highest wage-earners (and thus most
likely to have office jobs) gaining life expectancy the fastest:
[http://www.washingtonpost.com/news/wonkblog/wp/2012/11/21/wh...](http://www.washingtonpost.com/news/wonkblog/wp/2012/11/21/why-
rich-guys-want-to-raise-the-retirement-age/)

------
rmason
The Barney Miller show had an episode in season 8 where the plot revolves
around two surviving members of a Tontine.

[http://www.imdb.com/title/tt0519144/](http://www.imdb.com/title/tt0519144/)

~~~
Turing_Machine
There was also a very amusing British comedy on the subject, with Michael
Caine, Ralph Richardson, Peter Cook, Peter Sellers, Dudley Moore, among
others.

[http://www.rottentomatoes.com/m/wrong_box/](http://www.rottentomatoes.com/m/wrong_box/)

------
gwern
Fulltext links to the two cited papers:
[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2393152](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2393152)
, and
[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)

------
Camillo
> This is because royal financing in the late Middle Ages was a tricky thing.

I'd just like to point out that no part of this story has anything to do with
the Middle Ages. De Tonti and Louis XIV lived in the Modern age.

------
jedberg
How do you address the problem that the longest lived participants get the
majority of their payout when they are really old? Basically you're just
concentrating a lot of wealth into the hands of the long lived and their
offspring that they pass it to when they die shortly after getting their large
payouts.

I'm now imagining a scenario where this catches on and in a few generations
the life expectancy has a major bifurcation, as those that were already
destined to live longer through genetics now get an extra boost via inherited
wealth.

~~~
nostrademons
This is already happening, as people with more money, more skills, and better
health mate with other people like themselves, passing on their
genes/wealth/knowledge to their offspring. (Health, wealth, and IQ are all
correlated.)

As for what happens next...I think someone wrote a book about that:

[https://en.wikipedia.org/wiki/The_Time_Machine](https://en.wikipedia.org/wiki/The_Time_Machine)

~~~
jedberg
Now you've got me wondering if that was intentional symbolism in the book or
not. :)

------
zeveb
This reminds me a bit of the concept of lottery savings accounts, in which
principals are untouched and winners receive interest: it turns the common
human desire to gamble towards good, rather than evil.

I like it, too, because it just seems fairer than an annuity: there's an
upside as well as a downside.

------
deutronium
What happens if the tontine has a hitman as part of the group ;)

Reminds me a bit of
[https://en.wikipedia.org/wiki/Assassination_market](https://en.wikipedia.org/wiki/Assassination_market)

~~~
TrevorJ
An episode of the show "Archer" covered this fairly hilariously.

------
legitster
I like the idea. It's funky. It could do to retirements what HSAs have done
for health insurance. It also seems unnecessary that they are still illegal.

------
herbig
I like the idea of building this into bitcoin, where one only has to check
into the blockchain somehow each year to continue receiving payments.

------
njloof
This seems related to what corporations were doing when they were taking out
life insurance on their employees.

------
quotemstr
Isn't this headline a little clickbaity?

~~~
dang
More than a little. We changed it to a representative sentence from the
article. If anyone suggests a better (i.e. more accurate and neutral) title,
we can change it again.

~~~
thesteamboat
On a couple of stories I've noticed discussion about changing the title, which
is not always universally agreed with.

Is there a way to make this process more transparent, e.g. on changing title
posting a comment "Changed title from [x] to [y] because it was clickbait".

I don't mean to disparage the great work you're doing moderating, and I don't
want to throw pointless tasks at you for no reason, but I'm curious about the
former titles (and wondering if others are wondering as well).

~~~
dang
In cases where we replaced the article title I don't bother repeating it,
since you can see it there. In cases where we replace a submitter's rewrite, I
usually quote those in the thread. I'm reluctant to add features to HN's
software for this. It doesn't feel in the spirit of the site.

~~~
thesteamboat
Ah, knowing this policy is good enough! For some reason it didn't click in my
head that an unrepeated title would probably be the articles original title.
(Which in this case is clearly, unrepentantly clickbait.)

Thanks for the clarification.

------
teslaberry
all insurance of all types are a scam. worse, they are tax subsidized.

gambling is also a scam. gambling is a version of 'insurance' for the activity
of 'entertainment' that is called 'gambling'. there is NO gain to be had for
the gambler in the long run.

similarly, the insured will lose MORE money in the long run paying for
insurance as he would , statistically, in the short run. the idea that
insurance would prevent you from sudden ruin in case of an accident is also a
lie. plenty of insurance companies don't pay out entirely or resist paying
enough to prevent ruin.

by paying for insurance, society is guaranteed higher overhead in the long run
, higher litigation costs, and higher moral hazard as well as the rise of
scammers of insurance companies.

all this activity is a total waste and only works because of the tax subsidy
of the insruance industry scam.

if working people simply didn't have to pay ANY tax on labor including the
scam of payroll ss. and healthcare tax on labor than you would see how rich
the working classes would become how quickly. insurance companies have stolen
the right not to pay tax on a scam, which guarantees that their scam's attract
even more investors.

it's called the FIRE economy. READ ABOUT IT.

