George Kudrna
The Australian government has recently strengthened the means test of the age pension by raising the income reduction (taper) rate and also introduced labour earnings exemptions from the means testing to encourage labour supply of older Australians. This paper assesses economy-wide implications of further hypothetical changes to the means testing of the age pension that represents Australia's first pension pillar. To this end, we apply an overlapping generations (OLG) model for Australia, with the capacity to investigate changes in the taper and labour earnings exemptions.
Our results indicate that further increases in the taper combined with lower income tax rates lead to higher per capita labour supply and assets, as well as to welfare gains in the long run, while labour earnings exemptions have largely positive effects on average labour supply at older ages. Further increases in the taper also generate significant reductions in overall government spending on the pension and, therefore, could be used as an alternative policy to increasing the pension access age.
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