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

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  • Monika Butler
  • 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.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 418.

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Date of creation: 2011
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Handle: RePEc:igi:igierp:418

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  1. Barbezug des PK Vermögens? Teil 2
    by Monika Bütler in BATZ.ch on 2014-07-04 13:27:54
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Cited by:
  1. 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.
  2. 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.
  3. 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.

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