A 400-year-old system that pools money, paying out increasingly large amounts to surviving members upon the death of other members, is being discussed as a possible means of alleviating, at least in part, the current retirement crisis.
So says an NPR report that looks at the financial arrangement, invented by Lorenzo de Tonti—a Neapolitan banker in the 1600s—who first devised them as a financing mechanism for cities, states and governments that needed to raise money.
Jonathan Forman, a professor of tax and pension law at the University of Oklahoma, is quoted in the report saying, "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."
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Tontines are simpler than 401(k)s and Social Security plans, the report adds.
Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. People participating in them don't outlive the money—unless, of course, the tontine isn't structured properly, as happened around the turn of the last century in the U.S.
In the 19th century, American insurance companies had the brilliant idea of structuring tontines as investment products, the report says, but around 1905, some of those insurance companies mismanaged the funds, resulting in the disappearance of the final payouts.
At that point the government put an end to them—an ignominious end to a financial structure that had financed England's war against the French in 1693 and then was used by the French for a similar purpose.
Forman says in the report that all that's needed for a tontine 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."
Simpler, yes, but considering many of the headlines concerning misbehavior in the financial industry today, one wonders whether the last left living would be any better off than those surviving participants back in 1905.
And one wonders whether there's been sufficient change in public opinion just since 2015, when the Washington Post pointed out some of tontines' sleazier history—including the fact that Tonti ended up in the Bastille.
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