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King William's Tontine: Why the Retirement Annuity of the Future Should Resemble Its Past . By Milevsky Moshe A. . Cambridge University Press , 2015. Pp. xv, 257. $49.99, hardcover; $40.00, digital.
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"Those who cannot remember the past are condemned to repeat it," warned George Santayana (Reason in Common Sense 1905, p. 284). Moshe Milevsky wants us to remember a small bit of forgotten history precisely because he thinks we should repeat it.
The history he resurrects concerns the seventeenth- and eighteenth-century form of sovereign debt known as the tontine, named after its champion in the court of Louis XIV, Lorenzo de Tonti. Back then kings had to borrow to finance their wars. They might issue bonds that paid interest or sell annuities that promised higher annual payments but that would end when the lender died. Tonti's scheme was a twist on the life annuity. The interest payment on a tontine loan was paid, not to the individual subscribers, but to the subscribers as a group. That sum was divided each year among the group's surviving members. Heirs of those expiring had no claim on the payments. As a result, the annual payment to each recipient grew over the years as the number of survivors inevitably shrank. The last survivor received the entire annual interest payment due on the original loan. At the last death the principal reverted to the state.
The French, Dutch, and English governments used tontine loans multiple times in the seventeenth and eighteenth century to raise money. These schemes became famous for the large sums received by the last survivors (Kent McKeever, "A Short History of Tontines," Fordham Journal of Corporate and Financial Law 15 no. 2 (January 2010): 491-521).
There are two ways to look at the public's attraction to tontine debt instruments. Adam Smith suggested that the tontine appealed to the gambling instinct; "from the conï¬dence which every man naturally has in his own good fortune, the principle upon which is founded the success of all lotteries, [the tontine] annuity generally sells for something more than it is worth" (The Wealth of Nations, 1776, Volume 2, Book 5, Chapter 3, p. 548). Moshe Milevsky prefers to emphasize the advantage to...