Tuesday, May 02, 2017

Living Annuity

An Annuity is a fixed/known sum of money, paid out to someone over a known period, or for the rest of their lives. A Living Annuity is one in which the amount is not guaranteed, but is dependent on the performance of the underlying assets. The thing making the money. Guarantees cost money because someone is taking on the risk. A Guaranteed Annuity groups people, so those who live longer are 'cross-subsidised' by those who don't. The seller also has to guess, in advance, how much money it thinks it can make to make sure the payment is sustainable.

A Living Annuity means that if something goes wrong/right, the person receiving the money is affected. It will have to allow for the fact that it is much harder to guess how long one person is going to live, than to guess how long most people that age/gender etc. live (The law of large numbers). You don't want to 'run out of money', so the more uncertain you are, the bigger the buffer you need.

If a Universal Basic Income (UBI) was funded by Capital, it matters whether it is financing one person, or one of a group. A Community Wealth Fund like the Norwegian Sovereign Wealth Fund is big enough that it smooths out the risks you would have if you are dealing with just one person. One person can be (un)lucky. Two people can be (un)lucky. A billion people requires something to have changed structurally.

I like the idea of being Micro-ambitious. I would like to figure out how to finance 150 UBIs. It seems the simplest way to do that would be to start with financing one. Counter-intuitively, that is harder in some ways. 

If you go it alone, you need a much bigger buffer. A capital funded UBI for one person is similar to a living annuity in the risks it faces.

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