Advanced Search
MyIDEAS: Login to save this paper or follow this series

How Much Do Means-Tested Benefits Reduce the Demand for Annuities?

Contents:

Author Info

  • Monika Bütler
  • Kim Peijnenburg
  • Stefan Staubli

Abstract

We analyze the effect of means-tested benefits on annuitization decisions. Most industrialized countries provide a subsistence level consumption floor in old age, usually in the form of means-tested benefits. The availability of such means-tested payments creates an incentive to cash out (occupational) pension wealth for low and middle income earners, instead of taking the annuity. Agents trade-off the advantages from annuitization, receiving the wealth-enhancing mortality credit, to the disadvantages, giving up “free” wealth in the form of means-tested supplemental benefits. We find that the availability of means-tested benefits can reduce the desired annuitization levels substantially. Using individual level data, we show that the model’s predicted annuitization rates as a function of the level of pension wealth are roughly consistent with the cash-out patterns of occupational pension wealth observed in Switzerland.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-06/cesifo1_wp3493.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3493.

as in new window
Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:ces:ceswps:_3493

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: means-tested benefits; occupational pension; annuity; life-cycle model;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, American Economic Association, vol. 89(5), pages 1299-1318, December.
  2. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1573-1590, December.
  3. Carroll, Christopher D., 2005. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," CFS Working Paper Series 2005/18, Center for Financial Studies (CFS).
  4. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets," Working Papers, Center for Retirement Research at Boston College wp2009-3, Center for Retirement Research, revised Jan 2009.
  5. Monika Bütler & Stefan Staubli & Maria Grazia Zito, 2013. "How Much Does Annuity Demand React to a Large Price Change?," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 115(3), pages 808-824, 07.
  6. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan Storud, 2004. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," NBER Working Papers 10934, National Bureau of Economic Research, Inc.
  7. Laurence J. Kotlikoff & Avia Spivak, 1979. "The Family as an Incomplete Annuities Market," UCLA Economics Working Papers, UCLA Department of Economics 151, UCLA Department of Economics.
  8. Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle," NBER Working Papers 13748, National Bureau of Economic Research, Inc.
  9. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  10. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2007. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives," NBER Working Papers 13105, National Bureau of Economic Research, Inc.
  11. Powers, Elizabeth T., 1998. "Does means-testing welfare discourage saving? evidence from a change in AFDC policy in the United States," Journal of Public Economics, Elsevier, Elsevier, vol. 68(1), pages 33-53, April.
  12. Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
  13. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, Elsevier, vol. 82(1), pages 29-62, October.
  14. Pang, Gaobo & Warshawsky, Mark, 2010. "Optimizing the equity-bond-annuity portfolio in retirement: The impact of uncertain health expenses," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 198-209, February.
  15. B. Douglas Bernheim, 1992. "How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," NBER Working Papers 2942, National Bureau of Economic Research, Inc.
  16. Friedman, Benjamin M & Warshawsky, Mark J, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 135-54, February.
  17. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1994. "Precautionary Saving and Social Insurance," NBER Working Papers 4884, National Bureau of Economic Research, Inc.
  18. James Sefton & Justin vandeVen & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(528), pages 556-590, 04.
  19. Amy Finkelstein & James Poterba, 2002. "Selection Effects in the United Kingdom Individual Annuities Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(476), pages 28-50, January.
  20. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2011. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Public Care Aversion from Bequest Motives," Journal of Finance, American Finance Association, American Finance Association, vol. 66(2), pages 519-561, 04.
  21. Svetlana Pashchenko, 2010. "Accounting for non-annuitization," 2010 Meeting Papers, Society for Economic Dynamics 563, Society for Economic Dynamics.
  22. Gary Hansen & Selahattin Imrohoroglu, 2008. "Consumption over the Life Cycle: The Role of Annuities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 566-583, July.
  23. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
  24. Leora Friedberg, 1999. "The Labor Supply Effects of the Social Security Earnings Test," NBER Working Papers 7200, National Bureau of Economic Research, Inc.
  25. David Neumark & Elizabeth Powers, 1998. "Welfare for the Elderly: The Effects of SSI on Pre-Retirement Labor Supply," NBER Working Papers 6805, National Bureau of Economic Research, Inc.
  26. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series, Federal Reserve Bank of Chicago WP-09-02, Federal Reserve Bank of Chicago.
  27. Monika Bütler & Federica Teppa, 2007. "The choice between an annuity and a lump sum: Results from Swiss pension funds," NBER Chapters, in: Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement, pages 1944-1966 National Bureau of Economic Research, Inc.
  28. Rothschild, Casey G., 2009. "Adverse selection in annuity markets: Evidence from the British Life Annuity Act of 1808," Journal of Public Economics, Elsevier, Elsevier, vol. 93(5-6), pages 776-784, June.
  29. Ralph S. J. Koijen & Theo E. Nijman & Bas J. M. Werker, 2010. "When Can Life Cycle Investors Benefit from Time-Varying Bond Risk Premia?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(2), pages 741-780, February.
  30. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
  31. Neumark, David & Powers, Elizabeth, 1998. "The effect of means-tested income support for the elderly on pre-retirement saving: evidence from the SSI program in the U.S," Journal of Public Economics, Elsevier, Elsevier, vol. 68(2), pages 181-206, May.
  32. Direr, A., 2010. "The taxation of life annuities under adverse selection," Journal of Public Economics, Elsevier, Elsevier, vol. 94(1-2), pages 50-58, February.
  33. Dushi, Irena & Webb, Anthony, 2004. "Household annuitization decisions: simulations and empirical analyses," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 3(02), pages 109-143, July.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Barbezug des PK Vermögens? Teil 2
    by Monika Bütler in BATZ.ch on 2014-07-04 13:27:54
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Monika Bütler & Stefan Staubli, 2010. "Payouts in Switzerland: Explaining Developments in Annuitization," University of St. Gallen Department of Economics working paper series 2010, Department of Economics, University of St. Gallen 2010-06, Department of Economics, University of St. Gallen.
  2. Hardy Hulley & Rebecca Mckibbin & Andreas Pedersen & Susan Thorp, 2013. "Means-Tested Public Pensions, Portfolio Choice and Decumulation in Retirement," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 89(284), pages 31-51, 03.
  3. Gasche, Martin & Lamla, Bettina, 2012. "Erwartete Altersarmut in Deutschland: Pessimismus und Fehleinschätzungen – Ergebnisse aus der SAVE-Studie," MEA discussion paper series, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy 12264, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3493. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.