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

  • Bütler, Monika

    ()

  • Peijnenburg, Kim

    ()

  • Staubli, Stefan

    ()

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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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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