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Should Public Retirement Pensions Be Means-tested?

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  • Cagri Seda Kumru
  • John Piggott

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 differentiated by 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.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c015_049.

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Length: 34 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:deg:conpap:c015_049

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Related research

Keywords: Means-tested Pensions; Welfare; Social Security;

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References

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Citations

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Cited by:
  1. Cagri Seda Kumru & John Piggott, 2012. "Optimal Capital Income Taxation with Means-tested Benefits," DEGIT Conference Papers c017_019, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. Chung Tran & Alan Woodland, 2011. "Trade-Offs in Means Tested Pension Design," ANU Working Papers in Economics and Econometrics 2011-550, Australian National University, College of Business and Economics, School of Economics.
  3. Jan Hagemejer & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Efficiency of the pension reform: the welfare effects of various fiscal closures," Working Papers 2013-23, Faculty of Economic Sciences, University of Warsaw.

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