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

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.