Articles

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

Monika BUTLER, K. PEIJNENBURG, Stefan STAUBLI

Journal of Pension Economics and Finance

Forthcoming

Departments: Finance, GREGHEC (CNRS)

Keywords: Means-Tested Benefits, Occupational Pension, Annuity


We analyze the effect of means-tested benefits on annuitization decisions using an administrative dataset of pension wealth cash-out choices. Availability of means-tested payments creates an incentive to cash out pension wealth for low and middle income earners, instead of taking the annuity. Agents trade off the advantages from annuitization, receiving longevity risk insurance, to the disadvantages, giving up “free” wealth in the form of means-tested supplemental income. Our life-cycle model demonstrates that the availability of means-tested benefits substantially reduces the desire to annuitize especially for low and intermediate levels of pension wealth. In our empirical analysis we show that the model’s predicted fraction of retirees choosing the annuity is able to match the annuitization pattern of occupational pension wealth observed in Switzerland


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