This excellent, readable essay on universal pensions was written in 2006, but somehow escaped my attention. It was posted online, never published, and is one of the best short, non-technical introductions to the subject that I have ever seen. The author, a South African-Australian actuary, carefully explains that means tests are taxes, then explores the profound implications of this insight for pension design.
Here is the abstract, selected quotes from the paper, and the author’s specific recommendations for three countries. Pragmatically, the recommendations fall short of universal pensions. The full paper can be accessed at either of the two links below.
In South Africa particularly, but also in, Australia and the UK, means tests cannot be justified in their current form. The standard justification for means tests is that they make state pensions more affordable by targeting them towards those in greatest need. Means tests can however be seen as a tax on other income (and assets) in which case they are unrelated to questions of expenditure and affordability. A more careful evaluation of means tests against the different criteria of social justice suggests that the major problems are those of an unwarranted interference in the lives of pensioners and the efficiency of administration and incentives. ….
The introduction of a universal government guaranteed pension would reduce – even eliminate – calls for the state to artificially create instruments that match pension payments or otherwise subsidize pensions for the wealthy. ….
There appears to be a wide gap between the people in the departments responsible for social security and those for taxation. The best of the former are motivated mainly by compassion, the latter by efficiency; they come from different intellectual disciplines, read different newspapers and journals, appear likely to vote for different parties and are advised internationally by different agencies. The International Labour Office (ILO) advises the former and the World Bank and International Monetary Fund (IMF) interact with the latter. ….
If this analysis of the problem is true, the next step is to recommend that responsibility for determining means tests be transferred to the same government office as that responsible for deciding the incidence of taxation. This responsibility should extend to the evaluation of all means tests offered by central, state and local government. The clawback of means should be recorded clearly as a charge on income rather than a reduction in pensions and other allowances. If the logic of this paper is ineluctable, then one could expect such an office to recommend a move to a more just approach to means tests.
The administration of the evaluation of means should also be centralised with the administration of taxation. It should then become more efficient and lead to lower levels of intrusion in people’s lives.
Anthony Asher, “Means Tests: an evaluation of the justice of imposing high rates of claw-back on those of modest means“, presented to the Institute of Actuaries of Australia, Financial Services Forum, May 2006.
Also available here.
Anthony Asher is Associate Professor and Director of Actuarial Programs at the University of New South Wales (Australia). Previously, he was Professor of Actuarial Science at the University of the Witwatersrand, Johannesburg (South Africa). He was a member of South Africa’s Taylor Committee, which recommended ten years ago that means tests be abolished for age pensions, children’s allowances and other categorical benefits.