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Means-Tested Income Support, Portfolio Choice and Decumulation in Retirement

Abstract

We investigate the impact of means tested public income transfers on post-retirement decumulation and portfolio choice using theoretical simulations and panel data on Australian Age Pensioners. Means tested public pension payments in Australia have broad coverage and give insight into the incentive responsiveness of well-off, as well as poorer households. Via numerical solutions to a discrete time, finite horizon dynamic programming problem, we simulate the optimal consumption and portfolio allocation strategies for a retired household subject to assets and income tests. Relative to benchmark, means tested households should optimally decumulate faster early in retirement, and choose more risky portfolios. Panel data tests on inferred wealth for pensioner households show evidence of more rapid spending early in retirement. However they also show that better-off households continue to accumulate, even when facing a steeper implicit tax rate on wealth than applies to poorer households. Wealthier households also hold riskier portfolios. Results from tests for Lorenz dominance of the panel wealth distribution show no decrease in wealth inequality over the five years of the study.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp248.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 248.

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Length: 36 pages
Date of creation: 01 Apr 2009
Date of revision:
Publication status: Published as: Thorp, S., Hulley, H., McKibbin, R. and Pedersen, A., 2013, "Means-Tested Income Support, Portfolio Choice and Decumulation in Retirement", Economic Record, 89(284), 31-51.
Handle: RePEc:uts:rpaper:248
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Keywords: retirement wealth; life-cycle saving; public pension; portfolio choice;

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Find related papers by JEL classification:
  • D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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Cited by:

  1. Geoffrey Kingston & Lance Fisher, 2014. "Down the Retirement Risk Zone with Gun and Camera," Economic Papers, The Economic Society of Australia, vol. 33(2), pages 153-162, 06.
  2. Alexandra Spicer & Olena Stavrunova & Susan Thorp, 2015. "How portfolios evolve after retirement: evidence from Australia," CAMA Working Papers 2015-39, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Fedor Iskhakov & Susan Thorp & Hazel Bateman, 2015. "Optimal Annuity Purchases for Australian Retirees," The Economic Record, The Economic Society of Australia, vol. 91(293), pages 139-154, 06.
  4. Johan G. Andreasson & Pavel V. Shevchenko & Alex Novikov, 2016. "Optimal Consumption, Investment and Housing with Means-tested Public Pension in Retirement," Papers 1606.08984, arXiv.org.

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