Should Public Retirement Provision Be Means-Tested?

31 Pages Posted: 11 Jun 2009 Last revised: 27 Sep 2009

See all articles by Cagri S. Kumru

Cagri S. Kumru

Australian National University (ANU)

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics

Date Written: September 23, 2009

Abstract

The complex matrix of retirement policy trade-offs -encompassing elements of paternalism, market failure, and overlaying incentives in a life-cycle context- have received much attention in the literature. But the issue of whether publicly-funded retirement provision should be means-tested, and if so how, has received limited attention, although it has been highlighted from time to time. This paper examines the economic welfare effects of means testing using a stochastic overlapping generations model calibrated to the UK economy. A labor-leisure choice is incorporated, with multiple individuals with different endowments of effective labor. Our results indicate that a change in the taper rate has implications for both welfare and economic aggregates. In particular, with a second tier pension in place, it is welfare improving to strictly means-test the …first pillar. In contrast to much received wisdom, higher taper rates increase social welfare.

Keywords: Means-Tested Pensions, Welfare, Social Security

JEL Classification: E21, H55

Suggested Citation

Kumru, Cagri S. and Piggott, John, Should Public Retirement Provision Be Means-Tested? (September 23, 2009). UNSW Australian School of Business Research Paper No. 2009 AIPAR 01. Available at SSRN: https://ssrn.com/abstract=1417763 or http://dx.doi.org/10.2139/ssrn.1417763

Cagri S. Kumru (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

John Piggott

University of New South Wales (UNSW) - Australian School of Business, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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