In an era of population aging, the tension between adequate retirement incomes and sustainable budgets is increasingly challenging. Three broad strategies can improve both pension adequacy and sustainability: better targeting, increased levels and coverage of private saving, and delayed retirement. This policy brief re-visits the first of these policy options by describing the experience of Australia, where, unlike in most OECD countries, means-tested transfers play a primary role in retirement income provision. Complemented by mandated private savings, it is a setting that is expected to remain of primary importance and is fiscally sustainable even as the population ages. Australia has one of the lowest public pension outlays, as a proportion of GDP, among developed countries. With poverty defined using US parameters, Australia also has a low proportion of its elderly in poverty. The brief also looks at the emerging economic literature on means testing. It suggests that the costs of a means-tested scheme which may result in some disincentives to work and save, need to be weighed against the benefit of a cheaper, targeted scheme with fewer economy-wide distortions.
