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

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Author Info

  • Monika Bütler
  • Kim Peijnenburg

    ()
    (Department of Finance, Tilburg University, The Netherlands)

  • 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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Bibliographic Info

Paper provided by The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria in its series NRN working papers with number 2013-11.

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Length: 47 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:jku:nrnwps:2013_11

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

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References

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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
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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 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, 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 12264, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

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