A guaranteed minimum pension

Date

2000-09

Authors

Ingles, David

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Publisher

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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Working/Technical Paper

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Open Access

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