Expecting means-tested benefits in the old age: Behavioral differences and misjudgments

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Means testing of social benefits has been criticized for discouraging individual saving and work effort. At the same time means testing helps targeting benefits to those in need. In Germany basic security in the old age, so called “Grundsicherung im Alter” is means tested. In our analysis we investigate how many German households expect to receive basic security and whether they differ in their socio-demographic characteristics, their saving behavior and labor supply from those who do not have this expectation. Finally, we analyze whether some households have wrong expectations on which they ground their saving decisions and propose two possible reasons for their misjudgment. In the first part of the paper we present theoretical considerations on the relationship between the expectation to rely on means-tested benefits in the old age, saving and labor supply. In the second part of the paper, we divide the sample in two groups based on their self-assessed probability to receive basic security in the form of so-called “Grundsicherung im Alter” and document how these groups differ in their mean characteristics. Furthermore, we identify a fraction of households who most likely misjudge their eligibility based on survey answers on their public pension entitlements. The analysis is based on SAVE 2011. We find that 38% of German households believe with a high probability that they will be dependent on “Grundsicherung im Alter”. Households who expect to receive basic security differ significantly in their socio-economic characteristics from the households that do not expect to be dependent on this particular program. We further observe that these households exhibit a different savings and labor market behavior. Our analysis suggests that half of the households expecting to receive basic security misjudge their eligibility as they have already accumulated enough public pension rights today to place them above the threshold of the means-test. Finally, we argue that these misjudgments could be based on low (financial) knowledge and pessimism and show that differences between the two groups exist.

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