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How Well Does the Australian Aged Pension Provide Social Insurance?

Listed author(s):
  • Emily Dabbs

    (Research School of Economics, Australian National University)

  • Cagri Kumru

    (Research School of Economics, Australian National University)

Registered author(s):

    Social security plays an essential role in an economy, but if designed incorrectly can distort the labor supply and savings behavior of individuals in the economy. We explore how well the Australian means-tested pension system provides social insurance by calculating possible welfare gains from changing the settings in the current means-tested pension system. This work has been explored by other researchers both in Australia and in other pension-providing economies. However, most research ignores the fact that welfare gains can be found by reducing the cost of the program. To exclude these welfare costs, this paper fixes the cost of the system. We find that the means-tested pension system is welfare reducing, but does provide a better outcome than an equivalent-costing PAYG system. We also find that if the benefit amount is held constant, and hence the cost of the pension program is allowed to vary, a taper rate of 1.0 is optimal. However, once we fix this cost, a universal benefit scheme provides the best welfare outcome.

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    File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp339.pdf
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    Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp339.

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    Length: 23 pages
    Date of creation: Nov 2015
    Handle: RePEc:mrr:papers:wp339
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    1. 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.
    2. Cho, Sang-Wook (Stanley) & Sane, Renuka, 2013. "Means-Tested Age Pensions And Homeownership: Is There A Link?," Macroeconomic Dynamics, Cambridge University Press, vol. 17(06), pages 1281-1310, September.
    3. Anonymous, 0. "Appendix II," International Journal of Agrarian Affairs, International Association of Agricultural Economists, issue 1974-1975.
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