The problem: even if average retirement savings were adequate, a few long-lived individuals would outlive their savings.
Mutual funds with stocks and bonds have the potential to keep ahead of inflation. But to supply enough income indefinitely, you need to invest a lot more money than if you were able to use it up during your lifetime. The problem, of course, is that you don’t know how long you’ll live.
A possible solution would be a mutual fund where, when one member died (presumably of natural causes), his shares would be distributed among all members older than he was. You wouldn’t need to invest enough money to last to age 100, say, because the longer you lived, the more shares you would inherit from shorter-lived cohorts. This is essentially an inverted pyramid scheme, so it would complement conventional pension programs, which tend to pay less, or perhaps nothing -- it's hard to audit a promise of future benefits -- as one ages. Earnings would be distributed, but principal could not be withdrawn. Heirs would lose the chance of inheriting money from a conventional mutual fund, but wouldn’t have to worry about supporting an unexpectedly long-lived parent. Furthermore, ensuring life-long financial security at a relatively modest cost might free up assets that could be invested more aggressively and inherited by heirs.-- Ford, Feb 15 2008 MAD money?-- phoenix, Feb 15 2008 This is the way the Chris Rock (comedian) says Social Security works. Sadly African-Americans have shorter lifespans so they subsidize the longer lifespans of whites. As usual, he is funny and correct.
And why do I care about supporting people who outlive me? Using this system I would just pick people who genetically probably won't live very long for my group. So since I have several relatives that lived way past 100, I want a bunch of people who have cancer, heart disease or other nasty genetically linked conditions in my group.-- MisterQED, Feb 15 2008 I think there are life insurance policies which work this way. People start receiving payments after a certain age rather than a lump on death, or if they die before that certain age they get a lump on death.-- bungston, Feb 15 2008 A slow return tontine?-- AbsintheWithoutLeave, Feb 15 2008 [MisterQED] You are right that Social Security (if it honors its promises) also transfers money from short-lived to long-lived people. I wouldn't expect people who don't expect to live long to invest in my scheme -- they'd be better off with an ordinary mutual fund -- much as you might want them to. [bungston] Yes, annuities are essentially funded this way. The problem is, it's hard to be sure they're investing enough to meet future obligations, whereas it's much easier to detect outright theft from a mutual fund.-- Ford, Feb 15 2008 random, halfbakery