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This is completely correct. The only reason these sorts of silly financial instruments are available, and the only reason you're not at the top of the thread,

This is completely correct. The only reason these sorts of silly financial instruments are available, and the only reason you're not at the top of the thread, is because the level of basic economic literacy is so low. The question of why annuities are relatively unpopular is an interesting social/institutional one. From talking to some financial planners, it sounds like some crooked origins gave them a bad reputation (like used cars) that they have struggled to shake. Even today there are an unusual number of scummy annuities, although it's much lower than in the past. I suspect it's because they have several moving parts, and are a bit harder for the financial unsavvy to value and compare between companies, so the market gets more swindlers. EDIT: I previously also wrote "and the only reason this article is in the Washington Post without directly addressing these points," which is incorrect, as roymurdock helpfully pointed out.

ianhawes 10y ago
The article touches on this somewhat, but I think said differently: In an annuity, you're gambling against your own death. In a tontine, you're gambling against the deaths of others. From a purely cultural perspective, I think most Americans would rather gamble against the deaths of others.
roymurdock 10y ago
The article addresses both your point and the GP's point directly: Economists have long said that the rational thing to do is to buy an annuity. At retirement age, you could pay an insurance company $100,000 in return for some $5,000-6,000 a year in guaranteed payments until you die. But most people don’t do that. For decades, economists have been trying to figure out why. James Poterba, an economics professor at MIT who has extensively studied American retirement, says it’s still a mystery why annuities are so unpopular. A number of theories have been advanced — people might like to leave some money for their children, or they might worry about medical expenses late in life. Poterba and his colleagues have also pointed out that Social Security is already like an annuity, promising constant payments for life. But there’s also some evidence that people just irrationally dislike annuities. As behavioral economist Richard Thaler wrote in the New York Times: “Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even.” Here is where tontines come in. If people irrationally fear annuities because they seem like a gamble on one's own life, history suggests that they irrationally loved tontines because they see tontines as a gamble on other people's lives. I agree that financial literacy in the US is low, and the basic accounting/finance classes should be required at the high school level, but this article is good and draws upon a decent amount of actual economic literature. I recommend reading it to the end.
- jessriedel 10y ago
  I actually did read this article to the end back when it was written last year, but I wrote the above comment based on a faulty memory. Thank you for the correction. The problem with the article is less than I claimed, but it is still written in a confusing and sensational way.
- ianai 10y ago
  I'd bet it's mostly to do with fear of sudden, large expenses. Part of the reason to save up a large stock of funds is to be able to pay off big, unexpected bills. To shell out a large sum for an annuity also requires them to shell out (some?) of that ability. The elderly probably couple that with a disdain for taking on financial debt.
- iumtuip2001 10y ago
  I'd like to put forward another possible reason why someone might opt to not get an annuity... If you are financially savvy, or can pay someone else to be, does it not make more sense to invest your money yourself? There are a number of "too big to fail" companies, like GM, and Wells Fargo, that offer dividends. If you composed a portfolio of high dividend, stable, stocks... Could you theoretically have a "guaranteed" monthly income AND the ability to liquidate, in the event of an emergency?
  - greeneggs 10y ago
    > If you composed a portfolio of high dividend, stable, stocks... Could you theoretically have a "guaranteed" monthly income AND the ability to liquidate, in the event of an emergency? No. You can buy an annuity, or US Treasury bonds, but guaranteed high returns don't exist, and adding in a liquidity requirement doesn't help. Note that GM declared bankruptcy in 2009. Even if it is still "too big to fail," that doesn't mean investors can't lose all their money.
    - iumtuip2001 10y ago
      I never claimed guaranteed high returns. An annuity doesn't guarantee you "high" monthly income. It guarantees you AN monthly income. My comment was to address the question regarding why more people don't use annuities, and I'm not sure your response counters that. Regarding GM, yes, I'm aware they went bankrupt. But correct me if I'm wrong - Investors didn't lose their shares? The government bailed them out, and they're operational today. That's what I mean by "too big to fail".
matt_holden 10y ago
The unpopularity of annuities seems like a direct consequence of loss aversion, which says losses are more psychologically powerful than equivalent gains. [1] If I trade $100k in savings for an annuity, I'm starting off at a deep "loss", which becomes a "gain" only at some point in the uncertain future. Not surprising that most people won't take that bet. [1] https://en.wikipedia.org/wiki/Loss_aversion https://en.wikipedia.org/wiki/Loss_aversion
- Jtsummers 10y ago
  A lot of people also don't understand annuities. They don't understand how their bank (or whoever) can guarantee them a paycheck every year at a certain amount. It seems it's often not explained as a form of insurance.
  - tim333 10y ago
    Also I understand them but the rates seem a bit rubbish. I just got a quote for a 55 year old and they offered 3.7% (this is in the UK). For comparison you could buy rental property and get a yield like 6% plus capital appreciation. With property, you suddenly want a lump sum, you can sell or mortgage. With the annuity you are out of luck. Also the rent goes up with inflation, this annuity I think not.
    - deleted 10y ago
      [deleted]
    - jessriedel 10y ago
      This Vanguard annuity paying $1k/month starting at age 65 costs $168k, i.e., 7.1%. https://investor.vanguard.com/annuity/fixed https://investor.vanguard.com/annuity/fixed If you just directly attached this to a dummy pot of $120k, you'd have a $1k/month annuity at age 55 for $288k, which is already 4.2%. It also comes with the significant bonus that your estate keeps the $168k, plus what's left of the $120k, if you die before 65. So basically, I just think there are much better annuities out there than what you found.
    - 10y ago

ianhawes 10y ago

The article touches on this somewhat, but I think said differently: In an annuity, you're gambling against your own death. In a tontine, you're gambling against the deaths of others. From a purely cultural perspective, I think most Americans would rather gamble against the deaths of others.

roymurdock 10y ago

The article addresses both your point and the GP's point directly: Economists have long said that the rational thing to do is to buy an annuity. At retirement age, you could pay an insurance company $100,000 in return for some $5,000-6,000 a year in guaranteed payments until you die. But most people don’t do that. For decades, economists have been trying to figure out why. James Poterba, an economics professor at MIT who has extensively studied American retirement, says it’s still a mystery why annuities are so unpopular. A number of theories have been advanced — people might like to leave some money for their children, or they might worry about medical expenses late in life. Poterba and his colleagues have also pointed out that Social Security is already like an annuity, promising constant payments for life. But there’s also some evidence that people just irrationally dislike annuities. As behavioral economist Richard Thaler wrote in the New York Times: “Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even.” Here is where tontines come in. If people irrationally fear annuities because they seem like a gamble on one's own life, history suggests that they irrationally loved tontines because they see tontines as a gamble on other people's lives. I agree that financial literacy in the US is low, and the basic accounting/finance classes should be required at the high school level, but this article is good and draws upon a decent amount of actual economic literature. I recommend reading it to the end.

jessriedel 10y ago
I actually did read this article to the end back when it was written last year, but I wrote the above comment based on a faulty memory. Thank you for the correction. The problem with the article is less than I claimed, but it is still written in a confusing and sensational way.
ianai 10y ago
I'd bet it's mostly to do with fear of sudden, large expenses. Part of the reason to save up a large stock of funds is to be able to pay off big, unexpected bills. To shell out a large sum for an annuity also requires them to shell out (some?) of that ability. The elderly probably couple that with a disdain for taking on financial debt.
iumtuip2001 10y ago
I'd like to put forward another possible reason why someone might opt to not get an annuity... If you are financially savvy, or can pay someone else to be, does it not make more sense to invest your money yourself? There are a number of "too big to fail" companies, like GM, and Wells Fargo, that offer dividends. If you composed a portfolio of high dividend, stable, stocks... Could you theoretically have a "guaranteed" monthly income AND the ability to liquidate, in the event of an emergency?
- greeneggs 10y ago
  > If you composed a portfolio of high dividend, stable, stocks... Could you theoretically have a "guaranteed" monthly income AND the ability to liquidate, in the event of an emergency? No. You can buy an annuity, or US Treasury bonds, but guaranteed high returns don't exist, and adding in a liquidity requirement doesn't help. Note that GM declared bankruptcy in 2009. Even if it is still "too big to fail," that doesn't mean investors can't lose all their money.
  - iumtuip2001 10y ago
    I never claimed guaranteed high returns. An annuity doesn't guarantee you "high" monthly income. It guarantees you AN monthly income. My comment was to address the question regarding why more people don't use annuities, and I'm not sure your response counters that. Regarding GM, yes, I'm aware they went bankrupt. But correct me if I'm wrong - Investors didn't lose their shares? The government bailed them out, and they're operational today. That's what I mean by "too big to fail".

matt_holden 10y ago

The unpopularity of annuities seems like a direct consequence of loss aversion, which says losses are more psychologically powerful than equivalent gains. [1] If I trade $100k in savings for an annuity, I'm starting off at a deep "loss", which becomes a "gain" only at some point in the uncertain future. Not surprising that most people won't take that bet. [1] https://en.wikipedia.org/wiki/Loss_aversion https://en.wikipedia.org/wiki/Loss_aversion

Jtsummers 10y ago
A lot of people also don't understand annuities. They don't understand how their bank (or whoever) can guarantee them a paycheck every year at a certain amount. It seems it's often not explained as a form of insurance.
- tim333 10y ago
  Also I understand them but the rates seem a bit rubbish. I just got a quote for a 55 year old and they offered 3.7% (this is in the UK). For comparison you could buy rental property and get a yield like 6% plus capital appreciation. With property, you suddenly want a lump sum, you can sell or mortgage. With the annuity you are out of luck. Also the rent goes up with inflation, this annuity I think not.
  - deleted 10y ago
    [deleted]
  - jessriedel 10y ago
    This Vanguard annuity paying $1k/month starting at age 65 costs $168k, i.e., 7.1%. https://investor.vanguard.com/annuity/fixed https://investor.vanguard.com/annuity/fixed If you just directly attached this to a dummy pot of $120k, you'd have a $1k/month annuity at age 55 for $288k, which is already 4.2%. It also comes with the significant bonus that your estate keeps the $168k, plus what's left of the $120k, if you die before 65. So basically, I just think there are much better annuities out there than what you found.
  - 10y ago