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MEANS-TESTED AGE PENSIONS AND HOMEOWNERSHIP: IS THERE A LINK?

Published online by Cambridge University Press:  12 April 2012

Sang-Wook (Stanley) Cho and
Renuka Sane
Sang-Wook (Stanley) Cho*
Affiliation:
University of New South Wales
Renuka Sane
Affiliation:
Indira Gandhi Institute of Development Research
*
Address correspondence to: Sang-Wook (Stanley) Cho, School of Economics, University of New South Wales, Sydney, NSW 2052, Australia; e-mail: s.cho@unsw.edu.au.
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Abstract

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Although several targeted welfare programs across the world have made owner-occupied housing exempt from the means test, relatively little is known about the impact of such exemption on portfolio choice and consumption. We study the Australian age pension scheme and argue that current uncapped exemption may lead to distortionary incentives for high levels of housing wealth to be sheltered from the means test. We set up a life-cycle model with explicit housing choice and borrowing constraints to match some key features of the Australian economy. We find that abolishing the exemption of owner-occupied housing in the assets test increases aggregate output, capital accumulation, and welfare, but decreases housing investment and homeownership. However, removing such distortions does not necessarily imply that all households would be better off. Lowering taxes to maintain fiscal balance would result in wealthy households experiencing a large welfare loss, whereas the majority of the population would benefit.

Keywords

Means-Tested Age PensionsHomeownershipLife-Cycle ModelHousing Consumption

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Special Issue 6: Equality, Public Insurance, and Monetary Policy , September 2013, pp. 1281 - 1310
Copyright
Copyright © Cambridge University Press 2012 

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