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

  • Monika Bütler
  • Kim Peijnenburg

    ()

    (Department of Finance, Tilburg University, The Netherlands)

  • Stefan Staubli

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 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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