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

Daniel Wheadon, Gonzalo Castex, George Kudrna and Alan Woodland

Economic Modelling, 2024, vol. 138, issue C

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.

Keywords: Population aging; Social security; Age pensions; Means testing; Life cycle; Stochastic overlapping generations (search for similar items in EconPapers)
JEL-codes: C68 D15 E6 H2 H55 J18 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:138:y:2024:i:c:s0264999324001159

DOI: 10.1016/j.econmod.2024.106759

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