Means-Tested Age Pension and Homeownership: Is There a Link?
AbstractSeveral targeted welfare programs across the world have made owner-occupied housing exempt from the means test, such as the Supplementary Social Income (SSI) in the US and the age pension scheme in Australia. Relatively little is known about the impact of such exemption on household portfolio choice. We study the case of the Australian age pension scheme, and argue that current uncapped exemption may lead to distortionary incentives for very high levels of housing wealth to be sheltered from the means test. We set up a quantitative lifecycle framework, with business and housing investment, borrowing constraints, and wealth inequality, that is able to match a number of key features in the Australian economy. We find that abolishing the current exemption of owner-occupied housing in the assets test increases aggregate output, capital accumulation, and welfare, while lowering housing investment and homeownership. However, removing such distortions, however, does not necessarily imply that all households would be better off. The lowering of other taxes to maintain fiscal balance would result in households at the top of the wealth distribution experiencing a large welfare loss, however the majority of the population would benefit.
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Bibliographic InfoPaper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2011-02.
Length: 33 pages
Date of creation: Jan 2011
Date of revision:
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More information through EDIRC
means-tested age pension; homeownership; lifecycle model; portfolio choice;
Find related papers by JEL classification:
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
This paper has been announced in the following NEP Reports:
- NEP-AGE-2011-03-05 (Economics of Ageing)
- NEP-ALL-2011-03-05 (All new papers)
- NEP-DGE-2011-03-05 (Dynamic General Equilibrium)
- NEP-URE-2011-03-05 (Urban & Real Estate Economics)
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