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

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  • Bütler, Monika

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  • Peijnenburg, Kim

    ()

  • Staubli, Stefan

    ()

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 or income supplements. The availability of such meanstested 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 show that the availability of means-tested benefits can reduce the desired annuitization levels substantially. Moreover, 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 University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1124.

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Length: 50 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:usg:econwp:2011:24

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Keywords: Means-Tested Benefits; Occupational Pension; Annuity.;

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Cited by:
  1. 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.
  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.

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