Pension Schemes and Incentives: Case Studies from Australia and the United Kingdom

The use of selective benefits, directed to those considered most in need, has a high 'poverty reduction efficiency'. But selectivity inevitably produces non-linearities in the budget constraints facing individuals, which may have incentive effects. The design of a tax and transfer scheme requires these two aspects to be carefully balanced. This article considers the issues in the context of means-testing within the Australian and UK State pension schemes. In the Australian case, the main question concerns the incentive to save, while in the UK scheme the 'earnings rule' presents a strong disincentive to work beyond pension age. Copyright 1990 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.