George Kudrna

Implications of the 2009 Age Pension Reform in Australia: A Dynamic General Equilibrium Analysis

In the 2009/2010 budget, the Australian government announced a major reform of the Australian pension system. Using a dynamic, general equilibrium model, we simulate the implications of the major changes of the reform: a higher maximum pension rate, changes to the income means test and an increase in the eligibility age. The simulation results show positive long-run effects of the reform on labour supply, output, consumption and the capital stock as well as reduced pension expenditures. The reform generates large short-run welfare gains for older generations of low- and middle-income households due primarily to the increased maximum pension. The reform is potentially Pareto improving, yielding a small aggregate efficiency gain.

Means Testing of Public Pensions: The Case of Australia

The Australian age pension is noncontributory, funded through general tax revenues and means tested against pensioners?private resources, including labour earnings. This paper constructs an overlapping generations (OLG) model of the Australian economy to examine the economy wide implications of several counterfactual experiments in the means testing of the age pension. These experiments include policy changes that both relax and tighten the existing mean test. We also consider a policy change that only exempts labour earnings from the means testing. Our simulation results indicate that tightening the existing means test combined with lower income tax rates leads to higher labour supply, domestic assets and consumption per capita, as well as to welfare gains in the long run, while labour earnings exemptions from the means testing have largely positive e¤ects on labour supply at older ages. Population ageing is shown to further strengthen the case for the pension means testing.

Comparing Budget Repair Measures for a Small Open Economy with Growing Debt

In this study, we quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using a computable overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts. The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but have adverse consequences in the short run that are particularly severe under the immediate fiscal consolidation plan. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive, and especially the poor. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. Overall, the welfare trade-offs between current and future generations, as well as between the rich and poor, highlight key political constraints and point to challenging policy choices for the wellbeing of future generations.

Budget Repair Measures: Tough Choices for Australia's Future

This study quantifies the macroeconomic and welfare effects of three proposed fiscal measures to eliminate Australian government budget deficits and to reduce public debt by 2030, namely: (i) temporary income tax hikes; (ii) temporary consumption tax hikes (increases in the GST rate); and (iii) temporary transfer payment cuts. Our quantitative analysis is based on a computable overlapping generations (OLG) model that is tailored to the Australian economy. The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but severe adverse consequences during the fiscal consolidation period. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive, and especially the poor. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. Overall, the welfare trade-offs between current and future generations, as well as between the rich and poor, highlight key political constraints and point to tough policy choices for the wellbeing of future Australians.

Means Testing Social Security: Modeling and Policy Analysis

Means testing can balance the need to provide adequate retirement incomes with the requirement that such provision is fiscally sustainable and economically efficient. Critics of the policy suggest that to reduce benefits as a retiree’s income and/or wealth increase is to discourage work and savings. Yet such distortions are small compared to those resulting from large earnings related pensions that, due to demographic change, require greater levels of financing via payroll taxes. Some form of means testing exists in most countries, usually involving small, safety-net schemes that target the poorest retirees (e.g., the Supplemental Security Income program in the U.S.). But an appropriately designed means-testing instrument can also be used to reduce the liability of large, publicly financed social security promises by excluding the affluent. This paper summarises means-testing design and implementation in a number of OECD countries as well as tackling key criticisms of means testing. In doing so, we discuss a number of recent, cutting-edge modelling approaches and empirical insights that examine economic impacts of means testing in the Australian and U.S. contexts.