Monday, April 22, 2013

Bring Back the Tontine?

Does the secret of financial security in retirement reside in a product devised by a 17th-century Italian banker? In a WSJ column University of Toronto professor Moshe Milevsky proposes the return of the tontine.
Imagine a group of 1,000 soon-to-be retirees who band together and pool $1,000 each to purchase a million-dollar Treasury bond paying 3% coupons. The bond generates $30,000 in interest yearly, which is split among the 1,000 participants in the pool, for a guaranteed $30 dividend per member. A custodian holds the big bond and charges a trivial fee to administer the annual dividends. So far this structure is the basis for all bond index funds. Nothing new. But in a tontine arrangement the members agree that—if and when they die—their guaranteed $30 dividend is split among those who are still alive. 
So if one decade later only 800 original investors are alive, the $30,000 coupon is divided into 800, for a $37.50 dividend each. Of this, $30 is the guaranteed dividend and $7.50 is other people's money.  
Then, if two decades later only 100 survive the annual cash flow is $300, which is a $30 guaranteed dividend plus $270. When only 30 remain, each receives $1,000 in dividends—a 100% yield in that year alone.

Back in the Gilded Age, Milevsky notes, almost half of U.S. households owned some sort of tontine insurance. The policies appear to have been a form of deferred annuity, spiced up with a longevity bonus. Popularity led to excess – some tontine products amounted to little more than swindles, according to Wikipedia. Since 1906 tontines have been banned in the U.S.
Could the tontine make a comeback?
Francis Guy, The Tontine Coffee House. New-York Historical Society
The Tontine Coffee House on Wall Street, established in 1793, is still remembered because it became overcrowded with brokers. They decided to move out and form a stock exchange.

1 comment:

Addison Conroy said...

Je suis sur le point de vous parler de tontine ? Je ai vraiment , vraiment aime tontine . Si beaucoup a été écrit sur son influence sur la vie contemporaine , il est impossible de surestimer son impact sur la pensée moderne . Depuis qu'il a été comparé à anticonstitutionnellement beaucoup a été dit concernant la tontine par des entreprises commerciales mondiales , qui forment le dernier grand espoir pour notre civilzation . À la lumière de ce que je vais briser les questions afin de donner à chacun d'entre eux la pensée qu'ils méritent pleinement