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Optimal Design of Means Tested Retirement Benefits

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  • James Sefton
  • Justin vandeVen

Abstract

Design of welfare benefits is a tricky business. In this regard, James Meade believed that it is important to avoid excessive distortions to the price of labour. He also recognised that means testing is a useful way of limiting the 'hideously expensive' cost of universal benefits provision; he conjectured that a 50% claw-back rate might be appropriate. We use a rational agent model to explore the welfare effects of alternative retirement benefits arrangements in the UK. Our analysis supports an extensive role for means testing, consistent with Meade's conjecture, and highlights the distortions associated with alternative methods of benefits financing. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Suggested Citation

  • James Sefton & Justin vandeVen, 2009. "Optimal Design of Means Tested Retirement Benefits," Economic Journal, Royal Economic Society, vol. 119(541), pages 461-481, November.
    • Handle: RePEc:ecj:econjl:v:119:y:2009:i:541:p:f461-f481
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    Cited by:

    1. Whelan, Stephen & Atalay, Kadir & Hayward, Richard Donald, 2018. "Asset portfolio retirement decisions: the role of the tax and transfer system," SocArXiv akj8w, Center for Open Science.
    2. 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.
    3. 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.
    4. Justin van de Ven, 2016. "LINDA: A dynamic microsimulation model for analysing policy effects on the evolving population cross-section," National Institute of Economic and Social Research (NIESR) Discussion Papers 459, National Institute of Economic and Social Research.
    5. Islam, Nizamul & Colombino, Ugo, 2018. "The case for NIT+FT in Europe. An empirical optimal taxation exercise," Economic Modelling, Elsevier, vol. 75(C), pages 38-69.
    6. Justin van de Ven & Paolo Lucchino, 2013. "Modelling the Dynamic Effects of Transfer Policy: The LINDA Policy Analysis Tool," Melbourne Institute Working Paper Series wp2013n20, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    7. Dr Justin van de Ven, 2010. "The Effects of Myopia on Pension Decisions," National Institute of Economic and Social Research (NIESR) Discussion Papers 356, National Institute of Economic and Social Research.
    8. Bielecki, Marcin & Goraus, Karolina & Hagemejer, Jan & Makarski, Krzysztof & Tyrowicz, Joanna, 2015. "Small assumptions (can) have a large bearing: evaluating pension system reforms with OLG models," Economic Modelling, Elsevier, vol. 48(C), pages 210-221.
    9. 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.
    10. 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.
    11. van de Ven, Justin, 2017. "SIDD: An adaptable framework for analysing the distributional implications of policy alternatives where savings and employment decisions matter," Economic Modelling, Elsevier, vol. 63(C), pages 161-174.
    12. Fehr, Hans & Uhde, Johannes, 2014. "Means-testing and economic efficiency in pension design," Economic Modelling, Elsevier, vol. 44(S1), pages 57-67.
    13. Blundell, R. & French, E. & Tetlow, G., 2016. "Retirement Incentives and Labor Supply," 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 457-566, Elsevier.

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