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

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  • 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.

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  • Monika Bütler & Kim Peijnenburg & Stefan Staubli, 2011. "How Much Do Means-Tested Benefits Reduce the Demand for Annuities?," CESifo Working Paper Series 3493, CESifo Group Munich.
    • Handle: RePEc:ces:ceswps:_3493
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    Cited by:

    1. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C. & Zeldes, Stephen P., 2014. "What makes annuitization more appealing?," Journal of Public Economics, Elsevier, vol. 116(C), pages 2-16.
      • John Beshears & James Choi & David Laibson & Brigitte C. Madrian & Stephen P. Zeldes, 2012. "What Makes Annuitization More Appealing?," NBER Chapters,in: Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century National Bureau of Economic Research, Inc.
    2. repec:mea:meawpa:12264 is not listed on IDEAS
    3. Johannes Hagen, 2015. "The determinants of annuitization: evidence from Sweden," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 549-578, August.
    4. 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.
    5. Peijnenburg, J.M.J. & Nijman, T.E. & Werker, B.J.M., 2010. "Health Cost Risk and Optimal Retirement Provision : A Simple Rule for Annuity Demand," Discussion Paper 2010-14, Tilburg University, Center for Economic Research.
    6. 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, March.
    7. Gasche, Martin & Lamla, Bettina, 2012. "Erwartete Altersarmut in Deutschland: Pessimismus und Fehleinschätzungen – Ergebnisse aus der SAVE-Studie," MEA discussion paper series 201213, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    8. Peijnenburg, J.M.J. & Nijman, T.E. & Werker, B.J.M., 2010. "Optimal Annuitization with Incomplete Annuity Markets and Background Risk During Retirement," Discussion Paper 2010-11, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

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

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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