How Much Do Means-Tested Benefits Reduce the Demand for Annuities?
47 Pages Posted: 29 Jun 2011
Date Written: June 28, 2011
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.
Keywords: means-tested benefits, occupational pension, annuity, life-cycle model
JEL Classification: D810, D910, G230, J260
Suggested Citation: Suggested Citation