A Case For Tontines, A Morbid Mix Of Retirement Plan And Lottery

An ancient financial arrangement, a death pact known as a tontine, may be relevant to today's understanding of insurance, and how it could be cheaper and more efficient.

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This country faces a retirement crisis. For many people, Social Security alone is not enough. Pension plans are increasingly rare. Many Americans save with a 401k account. But Republicans have been talking of sharply limiting the contributions allowed as part of a tax reform bill. It's in this environment that some people talk of reviving a retirement plan that is centuries old. Here's Bryant Urstadt of the Planet Money podcast.

BRYANT URSTADT, BYLINE: 401(k) and Social Security plans - they take a lot of work. They take a lot of planning. But there is a simpler, older way - an approach from before the time of pie charts and index funds. It is called the tontine. Tontines were popular for centuries and, like many strange financial plans, sprang from the mind of a banker.

JONATHAN FORMAN: Tontines were invented, if you will, by Lorenzo de Tonti who was a banker in Naples back in the 1600s.

URSTADT: Jonathan Forman is a professor of tax and pension law at the University of Oklahoma, where he studies Tonti and his tontines.

FORMAN: And he initially offered them as a financing mechanism for city, states and governments that needed to raise money.

URSTADT: In this original version, the government of a city said, listen, rich citizens, give us a pile of money and we will pay you a regular payment kind of like interest. But there is one dark twist. As investors in the group die, their payments go to the survivors who get bigger and bigger payouts, which is perfect for retirement.

Instead of outliving your savings, being alive becomes really a pretty good deal financially. And this really caught on. King William of England organized a tontine to help pay for a war against the French in 1693. French fought back with their own tontines. It spread to America and then, says Forman, they got too big.

FORMAN: What happened in the 19th century was that some entrepreneurial-insurance-type companies, in New York largely, realized that, you know, you didn't have to have a government be the holder of the funds or be the manager of the tontine - that in fact this could be an investment product that would basically pay pensions to old people.

URSTADT: Insurance companies peddled tontines door to door. They got rich. They built skyscrapers. But it all ended around 1905. Some of those insurance companies - they mismanaged the funds and the final payouts never appeared. And the government stepped in and put an end to tontines. Professor Forman - he says there may be life in the tontine yet.

FORMAN: Every couple of months, I get contacted by some young energetic person who works for a company and thinks this is a great idea and wants to bring it to fruition.

URSTADT: He says that makes sense. Tontines might actually be a rational way to run retirement funds because regular retirement plans can be expensive to operate.

FORMAN: So they have to have a lot more money than they actually think they're going to pay out. And they have to invest it and do well with the investments.

URSTADT: But a tontine - that's pretty simple.

FORMAN: All I really need is somebody to hold the money, somebody to hold the box that we each contribute a thousand dollars to and somebody to keep track of who's alive and who's dead.

URSTADT: And that's the beauty of a tontine. It's just a pile of money that writes you a check that gets bigger until you die. And then you don't need it anymore. Bryant Urstadt, NPR News.

(SOUNDBITE OF SIMON JEFFERIS AND NATTY REEVES' "BRIXTON STRUT")

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