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

47 Pages Posted: 1 Jul 2011 Last revised: 18 Aug 2011

See all articles by Monika Butler

Monika Butler

University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute)

Kim Peijnenburg

Netspar; Centre for Economic Policy Research (CEPR); EDHEC Business School - Department of Economics & Finance

Stefan Staubli

University of Calgary

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2011

Abstract

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: D81, D91, G23, J26

Suggested Citation

Bütler, Monika and Peijnenburg, Kim and Staubli, Stefan, How Much Do Means-Tested Benefits Reduce the Demand for Annuities? (June 1, 2011). Netspar Discussion Paper No. 06/2011-52, Available at SSRN: https://ssrn.com/abstract=1876572 or http://dx.doi.org/10.2139/ssrn.1876572

Monika Bütler (Contact Author)

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Kim Peijnenburg

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

EDHEC Business School - Department of Economics & Finance ( email )

France

Stefan Staubli

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

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