Means testing plays an important role in the UK state pension system. We use a dynamic programming model to consider the effects of a recent policy reform that reduced the marginal tax rates on private income of means tested retirement benefits from 100% to 40%. Our analysis suggests that the policy reform will encourage the poorest third of all households to both save more and delay retirement, and have the opposite effects on richer households. The policy reform provides a reasonable compromise between the distortions associated with high marginal tax rates and the costs of universal benefits provision. Copyright � 2008 The Author(s).

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Design of welfare benefits is a tricky business. In this regard, James Meade believed that it is important to avoid excessive distortions to the price of labour. He also recognised that means testing is a useful way of limiting the 'hideously expensive' cost of universal benefits provision; he conjectured that a 50% claw-back rate might be appropriate. We use a rational agent model to explore the welfare effects of alternative retirement benefits arrangements in the UK. Our analysis supports an extensive role for means testing, consistent with Meade's conjecture, and highlights the distortions associated with alternative methods of benefits financing. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

This paper decomposes the redistributive effect on annual and lifetime inquality of a range of taxes and transfers in Australia, using a dynamic cohort lifetime simulation model. The redistributive effect is decomposed into vertical, horizontal and reranking effects. Horizontal inequities in the tax and transfer system are found to be negligible. The extent of reranking is greater in the lifetime than in the annual context and is affected by the equivalence scales used to adjust household incomes. If no adjustment is made to household incomes, reranking is about nine per cent of the reduction in lifetime inequality. However, if each child is counted as equivalent to one-third of an adult, reranking is found to be less than one per cent.