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 widespread. Two-tier formulas combine an income-conditioned bottom tier with an earnings-related top tier to achieve antipoverty and earnings replacement objectives. This paper first refutes the claim that the two-tier approach is generally more target-efficient in reaching the poor than is the earnings-related top tier with progressive replacement rates. Next, the paper compares the effectiveness of the two systems in terms of other goals. The paper concludes by showing that a top tier with a low tax on current income can virtually dominate a wide range of two-tier formulas.