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

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.business.uts.edu.au/qfrc/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
Date of creation: 01 Apr 2009
Date of revision:
Handle: RePEc:uts:rpaper:248
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Web page: http://www.qfrc.uts.edu.au/

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  16. Borsch-Supan, Axel, 1992. "Saving and Consumption Patterns of the Elderly: The German Case," Journal of Population Economics, Springer, vol. 5(4), pages 289-303.
  17. James P. Ziliak, 2003. "Income Transfers and Assets of the Poor," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 63-76, February.
  18. Neumark, David & Powers, Elizabeth, 1998. "The effect of means-tested income support for the elderly on pre-retirement saving: evidence from the SSI program in the U.S," Journal of Public Economics, Elsevier, vol. 68(2), pages 181-206, May.
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