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Sustainable and Equitable Pensions with Means Testing in Aging Economies

George Kudrna, Chung Tran and Alan Woodland ()

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: A means-tested pension system has a distinct feature that tailors the level of pension benefits according to individual economic status. In the context of population aging with widening gaps in life expectancies, this feature generates an automatic adjustment mechanism that (i) mitigates the pressing fiscal cost of an old-age public pension program (fiscal stabilization device) and (ii) redistributes pension benefits to those in need with shorter life expectancies (redistributive device). To evaluate this automatic adjustment mechanism, we employ an overlapping generations model with population aging. Our results indicate that this novel mechanism plays an important role in containing the adverse effects of population aging on the fiscal costs and progressivity of a pension system. More pronounced aging scenarios further strengthen the role of this mechanism. A well-designed means test rule can create a sufficiently strong automatic mechanism to keep public pensions sustainable and equitable. Importantly, it is feasible to devise a pension reform that better adapts a means-tested pension system to more pronounced demographic trends, but does not lower the welfare of current and future individuals of all ages and income.

JEL-codes: H2 H55 J1 C68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age
Date: 2018-12
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2018-666

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