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

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3493
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Keywords: means-tested benefits; occupational pension; annuity; life-cycle model;

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Find related papers by JEL classification:
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
  • D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
  • 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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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. Susan Thorp & Hardy Hulley & Rebecca McKibbin & Andreas Pedersen, 2009. "Means-Tested Income Support, Portfolio Choice and Decumulation in Retirement," Research Paper Series 248, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Hagen, Johannes, 2014. "The determinants of annuitization: evidence from Sweden," Working Paper Series, Center for Fiscal Studies 2014:13, Uppsala University, Department of Economics.
  3. 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.
  4. repec:mea:meawpa:12264 is not listed on IDEAS
  5. 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.
  6. 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.
  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. 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.

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