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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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