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Means-Tested Age Pensions And Homeownership: Is There A Link?

  • Cho, Sang-Wook (Stanley)
  • Sane, Renuka

Several 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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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 17 (2013)
Issue (Month): 06 (September)
Pages: 1281-1310

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Handle: RePEc:cup:macdyn:v:17:y:2013:i:06:p:1281-1310_00
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  1. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  2. 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.
  3. Neumark, David & Powers, Elizabeth, 1998. "The effect of means-tested income support for the elderly on pre-retirement saving: evidence from the SSI program in the U.S," Journal of Public Economics, Elsevier, vol. 68(2), pages 181-206, May.
  4. Fran�ois Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 459-485.
  5. repec:nsr:niesrd:283 is not listed on IDEAS
  6. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February.
  7. Yoshiro Miwa & Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2004. "Accounting for Changes in the Homeownership Rate," CIRJE F-Series CIRJE-F-312, CIRJE, Faculty of Economics, University of Tokyo.
  8. Sang-Wook (Stanley) Cho & Renuka Sane, 2014. "Means-tested Age-Pension and Saving," Discussion Papers 2014-03, School of Economics, The University of New South Wales.
  9. Chung Tran & Alan Woodland, 2011. "Trade-Offs in Means Tested Pension Design," Working Papers 201110, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  10. Bottazzi, Renata & Jappelli, Tullio & Padula, Mario, 2011. "The portfolio effect of pension reforms: evidence from Italy," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(01), pages 75-97, January.
  11. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  12. Dr Justin van de Ven & Dr Martin Weale, 2006. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," NIESR Discussion Papers 1389, National Institute of Economic and Social Research.
  13. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2010. "Winners and Losers in House Markets," Working Papers 2010-5, Central Bank of Cyprus.
  14. James Sefton & Justin vandeVen & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, vol. 118(528), pages 556-590, 04.
  15. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  16. Powers, Elizabeth T., 1998. "Does means-testing welfare discourage saving? evidence from a change in AFDC policy in the United States," Journal of Public Economics, Elsevier, vol. 68(1), pages 33-53, April.
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