How Well Does the Australian Aged Pension Provide Social Insurance?

23 Pages Posted: 3 Jul 2016  

Emily Dabbs

Australian National University (ANU)

Cagri S. Kumru

Australian National University (ANU)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2015

Abstract

Social security plays an essential role in an economy, but if designed incorrectly can distort the labor supply and savings behavior of individuals in the economy. We explore how well the Australian means-tested pension system provides social insurance by calculating possible welfare gains from changing the settings in the current means-tested pension system. This work has been explored by other researchers both in Australia and in other pension-providing economies. However, most research ignores the fact that welfare gains can be found by reducing the cost of the program. To exclude these welfare costs, this paper fixes the cost of the system. We find that the means-tested pension system is welfare reducing, but does provide a better outcome than an equivalent-costing PAYG system. We also find that if the benefit amount is held constant, and hence the cost of the pension program is allowed to vary, a taper rate of 1.0 is optimal. However, once we fix this cost, a universal benefit scheme provides the best welfare outcome.

Keywords: Social Security, Welfare, Superannuation

JEL Classification: E21, H55

Suggested Citation

Dabbs, Emily and Kumru, Cagri S., How Well Does the Australian Aged Pension Provide Social Insurance? (November 1, 2015). Michigan Retirement Research Center Research Paper No. 2016-339. Available at SSRN: https://ssrn.com/abstract=2802743

Emily Dabbs

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Cagri S. Kumru (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Paper statistics

Downloads
17
Abstract Views
87