Question

Which of the following are means-tested programs? [LO 21.5] a. A local public university starts to give financial aid to individuals who score above the 98th percentile on the SAT. b. The United Kingdom decides to start giving out pension benefits based on individuals' prior amount of savings. c. A government decides to give tax credits to anyone who purchases computers made domestically. d. Canada begins to pay half of the cost of public transportation for people who do not own a car.

Short answer

Option b is means-tested.

Step-by-step solution

Understand Means-Tested Programs

Means-tested programs are those that provide benefits based on the beneficiary’s income or financial resources. These programs aim to assist individuals who have financial need.

Analyze Option a

In this option, financial aid is given based on SAT scores rather than financial need. This is not a means-tested program because the criteria for benefits are academic performance, not income.

Analyze Option b

This option provides pension benefits based on individuals' prior savings, implying financial resources are a factor in eligibility. This could be considered a means-tested program as it takes financial capacity into account.

Analyze Option c

Tax credits are given simply based on purchasing domestically made computers, without considering the purchaser's income or financial need. This is not a means-tested program.

Analyze Option d

This program pays for public transport costs based on the current car ownership of an individual, which can often reflect an individual's financial status. However, it does not explicitly consider income or savings, making it not strictly means-tested.

Key concepts

Financial Aid

Financial aid programs are designed to help students cover educational costs, but not all financial aid is means-tested. Means-tested financial aid evaluates the financial need of students and their families to determine eligibility. Examples include Pell Grants in the U.S. and certain scholarships that specifically require proof of income or other financial need criteria.

Means-testing aims to allocate resources to those who are most in need. By assessing factors like household income and assets, these programs ensure that limited resources provide the greatest impact. It's essential to distinguish this from merit-based aid, which relies on academic performance or other specific achievements, as seen in the option where aid is awarded based on SAT scores.

Pension Benefits

Pension benefits can also be means-tested, especially when a government aims to support retirees with limited financial resources. In a means-tested pension program, an individual's eligibility might depend on their income and savings level. These assessments are crucial as they help to direct funds to those who have a genuine financial need for assistance during retirement years.

This concept contrasts with universal pension benefits, which are provided regardless of financial situation, ensuring everyone receives some level of support. The United Kingdom's example, where pension benefits relate to prior savings, can be interpreted as a means-tested approach since it aligns benefit distribution with financial capacity.

Tax Credits

Tax credits are reductions in tax liability granted under certain conditions. While some tax credits, like the Earned Income Tax Credit (EITC), are means-tested and dependent on financial need, others might not be. For instance, if a tax credit is given based simply on purchasing a domestic product, like computers in the example, it is not means-tested.

Means-tested tax credits aim to assist lower-income individuals or families, helping reduce their tax burden significantly. These credits ensure economic relief and promote equitable financial support, particularly for working families struggling to make ends meet.

Public Transportation Subsidies

Public transportation subsidies reduce the cost of travel for specific groups, like non-car owners, but may not always be means-tested. For a subsidy to be means-tested, it should be granted based on income level or financial need.

In Canada’s example, subsidies are given based on car ownership, which indirectly suggests some level of economic consideration but does not explicitly qualify as a means-tested program since it does not directly assess financial resources.

• Providing such subsidies can promote equal access to transportation, helping those who might still face mobility challenges due to financial barriers.
• Steps might include subsidizing costs directly linked to income thresholds to align more closely with means-testing principles.