Means-testing retirement benefits in the UK: Is it efficient?

We construct a dynamic stochastic general equilibrium model with overlapping generations in order to analyze the optimality of means-testing pension benefits in the UK. While previous studies only consider the long-run welfare effects of alternative policy reforms, we compute the full transition paths and separate aggregate efficiency effects by means of compensating transfers.We first demonstrate that it is qualitatively important to consider transitional cohorts and aggregate efficiency instead of long-run welfare, since the latter approach understates the dramaticsavings distortions arising from means-testing. Our findings indicate that the introduction of the pension credit (PC) was efficiency deteriorating. In order to reduce distortions induced by theUK pension system, benefits should be strictly means-tested against second pillar pension income only and not against private wealth.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

MORE ABOUT NETSPAR


Mission en strategy           •           Network           •           Organisation           •          Magazine
Board Brief            •            Actionplan 2023-2027           •           Researchagenda

ABOUT NETSPAR

Our partners

B20220412_SPIN_logo+naam_2xPMS_2_voettekst
B20160708_universiteit leiden
B20160708_asr
BPL_Pensioen_logo+pay-off - 1610-1225 v1.1_grijswaarden
B20221103_Zwitserlevengrayscale
View all partners