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Means Testing Retirement Benefits: fostering equity or discouraging savings?

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  • James Sefton
  • Justin Van De Ven
  • Martin Weale

Abstract

Means testing plays an important role in the UK state pension system. We use a dynamic programming model to consider the effects of a recent policy reform that reduced the marginal tax rates on private income of means tested retirement benefits from 100% to 40%. Our analysis suggests that the policy reform will encourage the poorest third of all households to both save more and delay retirement, and have the opposite effects on richer households. The policy reform provides a reasonable compromise between the distortions associated with high marginal tax rates and the costs of universal benefits provision.

Suggested Citation

  • James Sefton & Justin Van De Ven & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, vol. 118(528), pages 556-590, April.
    • Handle: RePEc:wly:econjl:v:118:y:2008:i:528:p:556-590
    DOI: 10.1111/j.1468-0297.2008.02133.x
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