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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 long-term behavioural 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 (based on wealth at age 65) to both save more and delay retirement, and have the opposite effects on richer households. In aggregate, the off-setting behavioural responses that we identify imply an overall delay in the timing of retirement, a fall in average savings, and a small effect on the government budget. We find that, on balance, the policy reform provides a reasonable compromise between the distortions associated with high marginal tax rates, and the costs implied by universal benefits provision.

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Bibliographic Info

Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 283.

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Date of creation: Jul 2006
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Handle: RePEc:nsr:niesrd:283

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Cited by:
  1. Fehr, Hans & Uhde, Johannes, 2012. "Optimal Pension Design in General Equlibrium," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62024, Verein für Socialpolitik / German Economic Association.
  2. van de Ven, Justin, 2011. "A structural dynamic microsimulation model of household savings and labour supply," Economic Modelling, Elsevier, vol. 28(4), pages 2054-2070, July.
  3. Cagri Seda Kumru & John Piggott, 2012. "Optimal Capital Income Taxation with Means-tested Benefits," CAMA Working Papers 2012-21, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Bütler, Monika & Peijnenburg, Kim & Staubli, Stefan, 2011. "How Much Do Means-Tested Benefits Reduce the Demand for Annuities?," Economics Working Paper Series 1124, University of St. Gallen, School of Economics and Political Science.
  5. Etheridge, B, 2012. "The Effect of Income Risk, Asset Risk and Policy Risk on Household Behaviour," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  6. Gasche, Martin & Lamla, Bettina, 2012. "Erwartete Altersarmut in Deutschland: Pessimismus und Fehleinschätzungen – Ergebnisse aus der SAVE-Studie," MEA discussion paper series 12264, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  7. Kudrna, George & Woodland, Alan, 2011. "An inter-temporal general equilibrium analysis of the Australian age pension means test," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 61-79, March.
  8. Susan Thorp & Hardy Hulley & Rebecca McKibbin & Andreas Pedersen, 2009. "Means-Tested Income Support, Portfolio Choice And Decumulation In Retirement," CAMA Working Papers 2009-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. Eichhorst, Werner & Gerard, Maarten & Kendzia, Michael J. & Mayrhuber, Christine & Nielsen, Conny & Rünstler, Gerhard & Url, Thomas, 2011. "Report No. 42: Pension Systems in the EU – Contingent Liabilities and Assets in the Public and Private Sector," IZA Research Reports 42, Institute for the Study of Labor (IZA).
  10. Scherger, Simone & Hagemann, Steffen & Hokema, Anna & Lux, Thomas, 2012. "Between privilege and burden: Work past retirement age in Germany and the UK," Working papers of the ZeS 04/2012, University of Bremen, Centre for Social Policy Research (ZeS).
  11. Callan, Tim & Van de Ven, Justin, 2011. "A Framework for Pension Policy Analysis in Ireland: PENMOD, a Dynamic Simulation Model," Papers WP400, Economic and Social Research Institute (ESRI).
  12. 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.
  13. Andras Simonovits, 2008. "Underreported Earnings and Old-Age Pension: An Elementary Model," IEHAS Discussion Papers 0805, Institute of Economics, Hungarian Academy of Sciences.
  14. 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.
  15. Sang-Wook (Stanley) Cho & Renuka Sane, 2011. "Means-Tested Age Pension and Homeownership: Is There a Link?," Discussion Papers 2011-02, School of Economics, The University of New South Wales.
  16. Van de Ven, Justin, 2011. "Do Defined Contribution Pensions Correct for Short-Sighted Savings Decisions? Evidence from the UK," Papers WP399, Economic and Social Research Institute (ESRI).
  17. Andras Simonovits, 2009. "When and How to Subsidize Tax-Favored Retirement Accounts?," IEHAS Discussion Papers 0902, Institute of Economics, Hungarian Academy of Sciences.
  18. John Piggott & Renuka Sane, 2011. "The Impact on Residential Choice of the Family Home Exemption in Resource-Tested Transfer Programs," Working Papers 201112, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  19. Callan, Tim & Keane, Claire & Walsh, John R., 2009. "Pension Policy: New Evidence on Key Issues," Research Series, Economic and Social Research Institute (ESRI), number RS14.

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