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Means Testing Retirement Benefits: fostering equity or discouraging savings?

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  • Dr Justin van de Ven
  • Dr Martin Weale

Abstract

Means testing plays an important role in the UK state pension system. We use a dynamic programming model to consider the long-term behavioural effects of a recent policy reform that reduced the marginal tax rates on private income of means tested retirement benefits from 100% to 40%. Our analysis suggests that the policy reform will encourage the poorest third of all households (based on wealth at age 65) to both save more and delay retirement, and have the opposite effects on richer households. In aggregate, the off-setting behavioural responses that we identify imply an overall delay in the timing of retirement, a fall in average savings, and a small effect on the government budget. We find that, on balance, the policy reform provides a reasonable compromise between the distortions associated with high marginal tax rates, and the costs implied by universal benefits provision.

Suggested Citation

  • Dr Justin van de Ven & Dr Martin Weale, 2006. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," National Institute of Economic and Social Research (NIESR) Discussion Papers 283, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:283
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    Cited by:

    1. Cho, Sang-Wook (Stanley) & Sane, Renuka, 2013. "Means-Tested Age Pensions And Homeownership: Is There A Link?," Macroeconomic Dynamics, Cambridge University Press, vol. 17(6), pages 1281-1310, September.
    2. Andras Simonovits, 2008. "Underreported Earnings and Old-Age Pension: An Elementary Model," CERS-IE WORKING PAPERS 0805, Institute of Economics, Centre for Economic and Regional Studies.
    3. James Sefton & Justin Van De Ven & Martin Weale, 2008. "Means Testing Retirement Benefits: fostering equity or discouraging savings?," Economic Journal, Royal Economic Society, vol. 118(528), pages 556-590, April.
    4. 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.
    5. John Piggott & Renuka Sane, 2011. "The Impact on Residential Choice of the Family Home Exemption in Resource-Tested Transfer Programs," Working Papers 201112, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
    6. Callan, Tim & van de Ven, Justin & Keane, Claire & O'Connell, Philip J., 2012. "A Framework for Pension Policy Analysis in Ireland: PENMOD, a Dynamic Simulation Model," Book Chapters, in: Callan, Tim (ed.),Analysing Pensions: Modelling and Policy Issues, pages 43-101, Economic and Social Research Institute (ESRI).
    7. Van de Ven, Justin, 2011. "Do Defined Contribution Pensions Correct for Short-Sighted Savings Decisions? Evidence from the UK," Papers WP399, Economic and Social Research Institute (ESRI).

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