Means Testing Pensions: The Case of Australia
Rafal Chomik and John Piggott
In an era of population aging, the tension between adequate retirement incomes and sustainable budgets is increasingly challenging. Three broad strategies can improve both pension adequacy and sustainability: better targeting, increased levels and coverage of private saving, and delayed retirement. This policy brief re-visits the first of these policy options by describing the experience of Australia, where, unlike in most OECD countries, means-tested transfers play a primary role in retirement income provision. Complemented by mandated private savings, it is a setting that is expected to remain of primary importance and is fiscally sustainable even as the population ages. Australia has one of the lowest public pension outlays, as a proportion of GDP, among developed countries. With poverty defined using US parameters, Australia also has a low proportion of its elderly in poverty. The brief also looks at the emerging economic literature on means testing. It suggests that the costs of a means-tested scheme which may result in some disincentives to work and save, need to be weighed against the benefit of a cheaper, targeted scheme with fewer economy-wide distortions.
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