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Non-linear means-tested pensions: Welfare and distributional analyses

Author

Listed:
  • Wheadon, Daniel
  • Castex, Gonzalo
  • Kudrna, George
  • Woodland, Alan

Abstract

We present a novel approach to public pension systems by introducing a new class of non-linear means tests, encompassing conventional linear pension systems. Our framework accommodates both progressive and regressive testing methodologies. We develop an overlapping generation model designed for a small open economy with heterogeneous agents, determining the socially optimal pension function. Through calibration of our model to the Australian context, we find that the optimal non-linear income test exhibits strong regressivity, coupled with a diminished average withdrawal rate as workers’ income increases. This work sheds light on optimizing pension structures to better align with the distributional and macroeconomic structure of the economy.

Suggested Citation

  • Wheadon, Daniel & Castex, Gonzalo & Kudrna, George & Woodland, Alan, 2024. "Non-linear means-tested pensions: Welfare and distributional analyses," Economic Modelling, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:ecmode:v:138:y:2024:i:c:s0264999324001159
    DOI: 10.1016/j.econmod.2024.106759
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    More about this item

    Keywords

    Population aging; Social security; Age pensions; Means testing; Life cycle; Stochastic overlapping generations;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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