Fehr & Uhde: Means-Testing and Economic Efficiency in Pension Design

ABSTRACT:

The present paper studies the efficiency properties of means-tested pay-as-you-go financed social security systems. Starting from a benchmark economy without social security, we introduce pension systems of various institutional designs and compare the costs arising from liquidity constraints as well as distortions of labor supply and the accumulation of savings versus the benefits from insurance provision against income uncertainty and mortality risk. We find a positive role of means-testing pension benefits against private assets from a long run welfare perspective. However, when taking transitional cohorts into account, our findings highlight strong aggregate efficiency losses.

 

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