"The return of the tontine." A 16th century solution to a 21st century problem

In my book Nursing Home Nor’ Easter I discussed the history of the tontine, which are named after a Neapolitan banker, Lorenzo de Tonti, who flew to France after participating in an unsuccessful revolution around 1650. The tontine is a 17th century French invention much like an annuity except there is no insurance company involved. A group of people, perhaps thirty, of roughly the same age each contributes a set amount of money to a pot, let us say $1,000 each, for a total of $30,000. If this is invested at 5%, then $1,500 is distributed each year to members of the group, which is called a tontine. So the thirty are getting $50 each. As tontine members die, their income is divided among the survivors, so the $50/year income increases with each death, until eventually there is only one person. That person gets the $1500/year income or the $30,000 principal. This would be an astounding return on his investment of $1,000. It also solves the problem of inflation because people are assured of getting increased income over time should they be still living.  Think of it! As the member of a tontine, you would have income for life and that income would increase over time.

This is a wonderful solution to retirement except for one thing: there is an incentive for members of the tontine to knock one another off in order to increase their income and odds of getting the pot at the end. Because of this, tontines, which were prohibited in the US and some other countries in the 19th century.

I mention this because I just saw an article in the Los Altos Town Crier with the title “The return of the tontine: a means to diversify retirement income.” Tontines are being recommended by Moshe Milevsky of York University in Canada. This would be an excellent solution to the retirement problem, provided that we can get over our hang-ups about the occasional murder that would inevitably result.