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How much do means-tested benefits reduce the demand for annuities?*


Means-tested retirement benefits create incentives to cash out pension wealth. Individuals 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. We quantify the impact of means-tested benefits with a calibrated life-cycle model, demonstrating that they substantially reduce the desire to annuitize especially for low and intermediate levels of pension wealth. Using an administrative dataset on pension choices, 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. On the base of our model, we also assess alternative policies such as mandatory annutization and tougher asset tests.

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We thank seminar participants at the University of St. Gallen, the University of Zurich, the Netspar Pension Workshop, and various conferences for helpful comments and suggestions. Part of this research was conducted while Kim Peijnenburg was visiting the Wharton School of the University of Pennsylvania, and she is grateful for their hospitality. We kindly acknowledge a research paper grant from the Centre for Pensions and Superannuationand Kim Peijnenburg acknowledges financial support from All Pensions Group.

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Journal of Pension Economics & Finance
  • ISSN: 1474-7472
  • EISSN: 1475-3022
  • URL: /core/journals/journal-of-pension-economics-and-finance
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