State-Sponsored Pensions for Private Sector Workers: The Case for Pooled Annuities and Tontines

Abstract

This paper explains how state governments could create new low-cost lifetime assurance funds to help provide retirement income security for millions of private-sector workers who currently lack pension coverage. Basically, an assurance fund operates like a mutual fund held within a defined contribution plan, but with the added features of mortality pooling and fully-funded lifetime payouts. As we envision them, assurance funds would be offered as annuity-like investment options on the new investment platforms being created by states like Oregon, California, and Maryland that offer their citizens the opportunity to participate in state-sponsored retirement savings plans. Adding an assurance fund could effectively turn these retirement savings plans into lifetime pensions. To ensure their sustainability, assurance funds would operate under a strict budget constraint and be organized as either tontines or pooled annuities.

A Proposal of a Pension Plan Design Based on Collective Pension Funds

“…Another study by Fullmer and Forman (2020) mention that state-sponsored pensions for private-sector workers can be enhanced through pooled annuities and tontines, which offer low-cost lifetime assurance funds. Hence, it can be said that tonuities plans combine the benefits of each of these products (annuities with tontines plans) because these plans reduce the capital solvency provision, assure payments or income at advanced ages, and each plan member can choose their optimal tenuity product with its corresponding switching time depending on their longevity risk, risk aversion, fund size and their cost of capital ratio.…”

Shaping the future of retirement: Aspects of sustainability

“…Currently, an appropriate response to the longevity risk remains to be implemented, and finding a sustainable solution is one of the challenges of the 21st century. One of those solutions is arguably moving towards a tontine-like structure, which is currently gaining more momentum in both academic literature and in practice (see, for example: Fullmer and Forman, 2020;Hoekstra, 2020).…”