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Key Findings Details

Means Testing Social Security: Modeling and Policy Analysis
Rafal Chomik, John Piggott, Alan D. Woodland, George Kudrna and Cagri Kumru
WP 2016-337

  • Contrary to conventional wisdom, our analysis has found that means testing delivers fewer overall distortions and increased welfare compared to a universal pension offering the same maximum benefit level.
  • Compared to an OECD average of 9.5% of GDP allocated to pension spending, Australia’s annual spend is 2.9% of GDP. Hence, the comparison with many OECD countries reveals that Australian pension arrangements are cheaper both at present and based on future projections. The lower cost is largely due to the flat rate benefit and means testing.
  • Means testing also increases incentives for self-provision. Reduced or zero public benefits payable to the richest groups of retirees can improve labour force participation for that group. Lower public spending on pensions can lead to higher aggregate labour supply – modelled to be 1.4% higher with means testing than with a universal pension.