Means Tests: An Evaluation of the Justice of Imposing High Rates of Clawback on Those of Modest Means

Abstract:     
Integration between flat state pensions, which make up the first pillar of a pension system, and other sources of retirement income is achieved in many countries by means tests that reduce the first-pillar pension. It is currently the subject of some debate in the UK and South Africa, and was also subject to detailed investigation in Australia during the mid-nineties.

This paper is written to evaluate the recommendations of the Taylor Committee of Inquiry into a Comprehensive Social Security System for South Africa: means tests should be abolished and the taxation of retirees and retirement funds increased in order to compensate. It attempts to focus on these two interrelated issues.

The conclusion is that in South Africa, Australia and the UK - at least - means tests cannot be justified in their current form. The standard justification for means tests is that they make state pensions more affordable by targeting them towards those in greatest need. Means tests can however be seen as a tax on other income (and assets) in which case they are unrelated to questions of expenditure and affordability. A more careful evaluation of means tests against the different criteria of social justice suggests that the major problems are those of an unwarranted interference in the lives of pensioners and the efficiency of administration and incentives.

Number of Pages in PDF File: 29

Keywords: State pension, Superannuation tax, equity, incentives, saving, retirement, means tests

JEL Classification: G23, H55, J26

working papers series