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Should Public Retirement Pensions Be Means-tested?

Author

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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.

Suggested Citation

  • Cagri Seda Kumru & John Piggott, 2010. "Should Public Retirement Pensions Be Means-tested?," DEGIT Conference Papers c015_049, DEGIT, Dynamics, Economic Growth, and International Trade.
    • Handle: RePEc:deg:conpap:c015_049
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    File URL: http://degit.sam.sdu.dk/papers/degit_15/c015_049.pdf
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    Cited by:

    1. Oliwia Komada & Krzysztof Makarski & Joanna Tyrowicz, 2017. "Welfare effects of fiscal policy in reforming the pension system," GRAPE Working Papers 11, GRAPE Group for Research in Applied Economics.
    2. 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.
    3. Emily Dabbs & Cagri Kumru, 2016. "How Well Does the Australian Aged Pension Provide Social Insurance?," Australian Economic Papers, Wiley Blackwell, vol. 55(3), pages 192-211, September.
    4. George Kudrna, 2016. "Australia’s Retirement Income Policy: Means Testing and Taxation of Pensions," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(01), pages 03-09, May.
    5. Cagri S. Kumru & John Piggott, 2017. "Optimal Capital Income Taxation with Means-tested Benefits," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(3), pages 227-262, July.
    6. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 713-780, Elsevier.
    7. Tran, Chung & Woodland, Alan, 2014. "Trade-offs in means tested pension design," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 72-93.
    8. Kudrna, George, 2016. "Economy-wide effects of means-tested pensions: The case of Australia," The Journal of the Economics of Ageing, Elsevier, vol. 7(C), pages 17-29.
    9. George Kudrna, 2015. "Means Testing of Public Pensions: The Case of Australia," Working Papers wp338, University of Michigan, Michigan Retirement Research Center.
    10. repec:ces:ifodic:v:14:y:2016:i:1:p:19217532 is not listed on IDEAS
    11. Makarski, Krzysztof & Tyrowicz, Joanna & Komada, Oliwia, 2021. "Efficiency versus Insurance: Capital Income Taxation and Privatizing Social Security," IZA Discussion Papers 14805, Institute of Labor Economics (IZA).
    12. Cagri S. Kumru & John Piggott & Athanasios C. Thanopoulos, 2015. "A Note on Resource Testing and Temptation," Working Papers wp340, University of Michigan, Michigan Retirement Research Center.
    13. George Kudrna, 2016. "Australia’s Retirement Income Policy: Means Testing and Taxation of Pensions," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(1), pages 03-09, 05.

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    More about this item

    Keywords

    Means-tested Pensions; Welfare; Social Security;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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