A guaranteed minimum pension
Date
2000-09
Authors
Ingles, David
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Graduate Program in Public Policy, Australian National University
Abstract
A guaranteed minimum pension has been adopted in several countries, and advocated by a
number of economists, as a means of dealing with the tricky issue of how to integrate a
private pension system with a minimum income guaranteed by governments. In the country
the means test is the instrument for this integration. In the GMP proposal, the age pension
would become an explicit top-up for those whose private pensions were insufficient to
guarantee an adequate retirement income.
In the 'classical' form of the GMP, several changes would be involved. First, benefits from
the compulsory superannuation tier would have to be taken in income (life annuity) form.
Second, the pension means test might be tightened. Third, the new means test would be
restricted in its application to income from the compulsory superannuation tier.
The concept of a lifetime income test underlying the GMP proposal appears to have
considerable merit as opposed to the current annual basis for the pensions means test. The
GMP, once the SG system is fully phased in and has been operating for some time, confines
redistributions to the lifetime poor and avoids giving assistance to the lifetime rich virtually
irrespective of their savings/investment, consumption and tax planning decisions. However
there are a number of tricky issues which would need to be resolved in moving to a GMP.
The GMP, in its "classic' form, would work best in a context where there was a substantial
compulsory superannuation tier quite separate to any top-up superannuation schemes, and
where all benefits from the SG tier were payed as indexed life annuities. Benefits from this
tier would become the sole basis for assessing GMP entitlements.
Where there is a mixed system such as Australia's, and many superannuants have
entitlements derived from a mixture of SG and additional contributions, the conceptual basis
of the GMP becomes watered down. A compromise proposal is to base it on the whole of the
superannuation payout.
A further problem is that if annuity take-up is not compulsory, the GMP payment might, over
time, not prove adequate for those who through poor planning or bad luck dissipate their
superannuation lump sums. On the other hand compelling annuity take-up raises a number of
difficult issues.
Because of these problems, in this country the GMP is probably most interesting in the
"purchased pension" form, which is itself a form of the "minimum necessary annuity"
proposal. In this, a specific part of the total superannuation payout would be given up in
payment for receipt of a full pension. Appropriately modified, this "purchased pension"
system might have the potential to entirely supplant the current system of superannuation
taxation and means testing.
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Citation
Ingles, D. (2000). A guaranteed minimum pension. Public Policy Discussion Paper 78. Canberra, ACT: Graduate Program in Public Policy, The Australian National University.
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