OPTIONS IN INCOME SUPPORT FOR THE AGED : A CRITIQUE OF THE TWO-TIER APPROACH

Support for the two-tier approach to income maintenance for the aged is becoming increasingly widespread. Two-tier formulas combine an income-conditioned bottom tier with an earnings-related top tier in order to achieve both antipoverty and earnings replacement objectives. This paper first refutes the frequent claim that the two-tier approach is more target-efficient in reaching the poor than is the earnings-related top tier with progressive replacement rates. After showing that both approaches can be equally target-efficient, we compare the effectiveness of the two systems in terms of other goals. We also examine how the tradeoffs among goals in moving from one system to the other depend on the correlation between preretirement earnings and current income of the aged. It is seen that .the higher is the correlation, the less at- tractive is the two-tier approach. The paper concludes by demonstrating that a formula with a low tax on current income and a progressive earn- ings-related benefit schedule can virtually dominate a wide range of two-tier formulas. Support for the two-tier approach to income maintenance for the aged is becoming increasingly widespread. Two-tier formulas combine an income-conditioned bottom tier with an earnings-related top tier in order to achieve both antipoverty and earnings replacement objectives. This paper first refutes the frequent claim that the two-tier approach is more target-efficient in reaching the poor than is the earnings-related top tier with progressive replacement rates. After showing that both approaches can be equally target-efficient, we compare the effectiveness of the two systems in terms of other goals. We also examine how the tradeoffs among goals in moving from one system to the other depend on the correlation between preretirement earnings and current income of the aged. It is seen that .the higher is the correlation, the less at- tractive is the two-tier approach. The paper concludes by demonstrating that a formula with a low tax on current income and a progressive earnings-related benefit schedule can virtually dominate a wide range of two-tier formulas.