Over 100 years ago in America — before Social Security, before IRAs, corporate pensions and 401(k)s — there was a ludicrously popular (and somewhat sleazy) retirement scheme called the tontine.
At their peak, around the turn of the century, tontines represented nearly two-thirds of the American insurance market, holding about 7.5 percent of national wealth. It’s estimated that by 1905, there were 9 million tontine policies active in a nation of only 18 million households. Tontines became so popular that historians credit them for single-handedly underwriting the ascendance of the American insurance industry.
The downfall of the tontine was equally dramatic. Not long after 1900, a spectacular set of scandals wiped the tontine from the nation’s consciousness. To this day, tontines remain outlawed, and their name is synonymous with greed and corruption.
You buy into a tontine alongside many other investors. The entire group is paid at regular intervals. The key twist: As your fellow investors die, their share of the payout gets redistributed to the remaining survivors.
Milevsky’s point is that it’s time for tontines to return again on the private market. He envisions tontines competing against annuities and longevity insurance and all the other products available to people hoping to smooth out the last stretch of their lives. He’s certain many people would find them appealing.
Such a system would be cheaper to operate and would always, by definition, be fully funded.