Portfolio Allocation in the Face of a Means‐Tested Public Pension

Abstract

We investigate whether households adjust their asset portfolios just prior to retirement in ways that are consistent with maximizing eligibility for a means-tested public pension. We utilize detailed micro data for a nationally-representative sample of Australian households to estimate a system of asset equations which are constrained to add up to net worth. Our results provide little evidence that healthy households or couples are responding to the incentives embedded in the means tests determining pension eligibility by reallocating assets. While there are some differences in asset portfolios associated with having an income near the income threshold, being of pensionable age, and being in poor health, these differences are often only marginally significant and are not clearly consistent with the incentives inherent in the Australian age pension eligibility rules. Any behavioral response to the incentives inherent in the age-pension means test appears to be predominately concentrated among single pensioners who are in poor health.