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Can tontines remedy America's social security problem?

In a world where people are living longer as a result of innovations in healthcare and medicine, tontines provide a necessary solution to retirement insecurity.

Can tontines remedy America's social security problem?

Americans are increasingly concerned that Social Security benefits will no longer exist to cushion their retirement.

Before the coronavirus pandemic, Social Security was projected to run out by 2035. Unfortunately, high unemployment resulting from the Covid-19 pandemic and the subsequent decrease in payroll tax income have shortened that timeline.

Due to the pandemic’s economic impacts, the Bipartisan Policy Center, a non-partisan think-tank in D.C., projects that the retirement fund could run out completely by 2028.

Analysis by the Wall Street Journal shows that Social Security payouts will outweigh the fund’s income as soon as 2021 for the first time in decades. However, the coronavirus pandemic only sped up a process that was already in the works: insolvency of the social security fund.

Even though most families put money aside for retirement, a Gallup poll showed that a striking 57 percent of Americans “rely on Social Security as a major income source” for retirement.

Data from the Center on Budget and Policy Priorities also indicates that nearly 40 percent of Americans over 65 would be in poverty without Social Security to source or supplement their income.

Furthermore, reduced or cancelled Social Security benefits would disproportionately affect the poorest and most underserved Americans, many of whom lack the earnings or resources to put aside enough money for a liveable retirement.

Rather than defaulting on the stopgap solution of reducing benefits to 75 percent, both state and federal governments need to restructure Social Security funds dramatically.

Fortunately, we can look to private sector, state, and international examples for a sustainable, low-cost pension structure alternative.

Seeking to solve retirement instability, innovative companies like Tontine Trust have turned to the old but proven pension structure for which the company was named: the tontine.

As the world’s first tontine-exclusive fintech pension company, Tontine Trust is leveraging 21st Century technology to guarantee secure and accessible lifelong income. Initially, they will offer products directly to consumers in 27 countries across Europe, but partnership discussions are already in the works with governments and international institutions.

So what is a tontine? A tontine is a pooled retirement fund that pays out dividends proportional to members contributions, much like an annuity. However, once a member dies, the deceased member’s remaining benefits are allocated to surviving members.

Instead of worrying about outliving their funds, tontine members can anticipate larger payouts the longer they live. Tontines also have the added advantage of being able to make micro adjustments to their annuity payments. This mechanism ensures that funds are paid out at a sustainable rate and protects the fund from insolvency.

“At the moment, if you are a retiree with a 401k or a Roth IRA, then you are taking a bet that you will die before your money runs out. That’s morbid. In a tontine, you are betting on yourself to live. The benefits of this change in mindset for both individuals and societies is enormous,” explains Dean McClelland, the founder of Tontine Trust.

Other examples of successful tontines and quasi-tontines include Wisconsin’s state pension system, Nippon Life Insurance Co.’s tontine pension system, and the Swedish national pension system.

From 2014 to 2017, Wisconsin’s pension fund ran a surplus and is consistently among the top three best-funded state pensions in America. Wisconsin stands in stark contrast to most other state pensions—in 2017, only eight of fifty U.S. state pensions were over 90 percent funded.

Internationally, Nippon Life’s tontine has attracted over 75,000 members since the product launched in 2016. And in 2019, the Melbourne Mercer Global Pension Index ranked the semi-private Swedish pension system as the fifth best in the world, which is no surprise given Sweden’s reputation for having an effective and robust social security network.

While tontines enjoyed popularity during the 18th and 19th centuries, they fell out of style in America after instances of fraud amid the overwhelmingly unregulated insurance industry of the early 1900s. Congress passed legislation to combat the exploitation, but insurance companies shifted away from tontines after the new laws cut into profits.

Fortunately, better financial transparency and the invention of secure technologies like distributed ledgers are already creating more dependable systems. Now, tontine members are at no greater risk of fraud than owners of a regular life insurance policy or Roth IRA.

Even as tontines enjoy growing popularity in Europe and Asia, certain roadblocks stand in the way of their repopularization in the United States. Misinformation and misconceptions about tontines’ legality pose the biggest challenge.

In reality, insurance companies stopped offering tontines because new government regulations hurt their profits, not because they were banned altogether. Furthermore, many unofficial tontines and quasi-tontines already exist legally within the U.S., and the tontine’s mechanisms have been “consistently upheld as being legal.”

In a world where people are living longer as a result of innovations in healthcare and medicine, tontines provide a necessary solution to retirement insecurity in both the developed and developing societies.

State pension funds and federal Social Security would do well to follow the example of Wisconsin and Sweden before millions of elderly American plunge into poverty.

The issue of Social Security insolvency should be addressed sooner rather than later; fortunately, many examples exist internationally and in the private sector to pave the way.


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