What If the Last Survivor Takes Everything? An Arrangement Nobody Allows Any More

A group of subscribers each contributed a sum to a pooled fund, which was invested, and the income was divided among the surviving subscribers annually. As members died their shares were not paid to their heirs but were redistributed among those still living, so the income of each survivor rose steadily. The last survivor received the entire income, and in some versions the capital as well. Governments used the structure to raise money, since it attracted subscribers who valued the prospect of a rising income in old age, and it was cheaper for the state than an ordinary loan because the obligation shrank as subscribers died and ended entirely with the last of them.

The arrangement solved a genuine problem that ordinary saving does not:

• •It guaranteed rising income precisely when other income was falling
• •It pooled longevity risk, which no individual can manage alone
• •It required no insurer to bear that risk or to be trusted with it
• •It cost the state less than borrowing at a fixed rate
• •It required no estimate of how long anybody would live
• •It appealed to people without heirs, for whom leaving nothing was no loss

The obvious problem with an arrangement that rewards survival is that it gives every member a direct financial interest in the deaths of the others, and that was not merely theoretical. Suspected murders among subscribers are documented, insurers and administrators falsified records of deaths and survivals, and the structure was used as a vehicle for outright fraud in the United States, where companies sold arrangements they never intended to honour and where abuses led to a major investigation in 1905. Several jurisdictions prohibited them outright. The plot possibilities were exploited enthusiastically in fiction, which is how most people have encountered the idea, and the fictional treatment has largely displaced the historical reality.

The arrangement takes its name from Lorenzo de Tonti, a Neapolitan banker living in France, who proposed it to the French government around 1653 as a way of raising money without the political difficulty of new taxation. The proposal was not adopted immediately and Tonti himself ended in the Bastille over unrelated financial dealings. France adopted the structure in 1689 and used it repeatedly. Britain followed in 1693 to fund a war, and further issues followed in several countries through the eighteenth century. The name has stuck to the structure despite Tonti neither inventing the underlying idea, which appears in earlier Italian arrangements, nor profiting from it.

The structure has attracted renewed serious attention, which is surprising given the history. The problem it solved has returned, since people live longer, defined benefit pensions have largely disappeared, and individuals saving for retirement face the genuine difficulty that nobody knows how long their money must last, so they either spend too little and die wealthy or spend too much and run out. An annuity solves that and requires an insurer to bear the risk and charge for it, which makes annuities expensive. A pooled arrangement solves it without an insurer, and several economists have proposed modernised versions with safeguards, with pilot products launched in a few countries, which is a genuine revival of an idea with a very poor reputation.

Subscribers pooled capital and received an income that grew as members died, with the last survivor taking everything, which governments used to raise money cheaply. It pooled longevity risk without requiring an insurer, which is a real service. Giving every member a financial interest in the others' deaths produced documented abuses and fraud, and prohibitions followed. Economists have proposed modernised versions because the underlying problem has returned.