By Jasmin Sethi

Retirees are often faced with the fear of outliving their assets. This fear, also known as longevity risk, has been eased by the availability of annuities, specifically annuities that I’ve termed in my paper as guaranteed income products, or GIPs, that offer fixed payments until death.

One would think that a product offering fixed payments for life would be more popular among retirees, but the reality is that Americans choose not to purchase annuities. Why? A big factor is the costs insurers charge as they incur the risk of guaranteeing payments for life. Another is that annuities consist of complex products that require complex regulation, driving the purchase price–and public distaste–of these annuities even higher.

Enter Tontines–A Cheap, Efficient GIP

Broken down, a tontine functions as a pooled investment arrangement where a group of retirees contribute a lump-sum payment into a pool and then receive equal payouts of the total pooled amount for life. Here’s the kicker–as each member of the pool dies, the payout is divided amongst the surviving members of the pool. So theoretically, if only half of retirees in the original pool are still alive, then they’ll be getting twice as much money.

This basic tontine structure works to reduce costs in several ways. First, since insurers no longer incur the risk of offering fixed payments for life (as that risk is now shared within the pool), the cost of administering and managing a tontine is significantly less than the cost associated with the typical annuity product. Second, the cost of overseeing a single pooled investment that requires minimal supervision would be much lower than the costs associated with managing tailored and individualized investment accounts.

Why Aren’t Tontines More Popular?

Tontines offer inexpensive and meaningful protection against longevity risk by allowing retirees to turn their wealth into a stream of income for life. Yet, they barely exist in America today, and most Americans have not even heard of tontines save for plotlines–like The Simpsons and Archer–that involve participants murdering other members of their tontine to collect more money.

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