Guaranteed minimum income programs

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Guaranteed minimum income programs (sometimes also referred to as "minimum income protection programs") are a set of income redistribution policies that provide lower-earning individuals with supplemental government payments up to a minimum total income threshold, which is usually established as that jurisdiction's "social floor," or the minimum standard of poverty permitted by the government. In contrast with basic income programs, the amount of payments made to an individual or family is dictated not as a common, fixed amount, but as the shortfall, if any, between the recipient's current income and the amount of income set as the minimum standard of poverty. In addition, unlike universal income programs, which are provided to an entire population, guaranteed minimum income programs are only available to individuals or families that have been "means tested," or determined to have income below the social floor. Program eligibility may also be conditioned on other factors such as residency, citizenship, age, wealth or employment status. The amount of guaranteed minimum income may vary based on factors such as family size or geography-based cost of living adjustments.

CONCEPT


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Goals
Conceptual Example

Over the past decade, a country's economy has transitioned from a middle-class economy with low income inequality into an economy of high income inequality. A subset of the population is becoming more highly educated and achieving greater returns from invested capital, while another subset of the population remains mired in poverty. Efforts to raise the minimum wage have slowed this trend, but not reversed it, and fears exist that further increasing the minimum wage will result in significant declines in employment. As a result, the country institutes a guaranteed minimum income program. Higher income-earners are taxed more progressively, and income is redistributed to lower income-earners up to an amount calculated by the government as the minimum amount of income to provide housing, education, health and other basic services. As a result of the policy, income inequality declines, and a greater share of the population is able to improve their education, boost their productivity, and ultimately attain higher incomes.

Specific Example

Between 2008 and 2014, the Country of Cyprus' unemployment rate climbed from the lowest in Europe to its third-highest. [1] This increase in unemployment and related worsening economic conditions resulted in a reduction in the national tax base at the same time that it increased the demand for national expenditures on public assistance. [1] On August 29, 2013, as a result of these budgetary pressures, in conjunction with financial support from the International Monetary Fund, Cyprus submitted a Letter of Intent that, among other factors, promised "to undertake a fundamental reform of our social welfare system, based on the introduction of a guaranteed minimum income program and consolidating overlapping benefits." [2] Shortly after submitting this Letter of Intent, in 2014, Cyprus implemented a guaranteed minimum income (GMI) by passing the Guaranteed Minimum Income and Social Benefits Law of 2014. [1]

Under Cyprus' GMI system, the total benefit to a recipient is calculated as the difference between the amount of guaranteed income and the family's income, plus several additional cash allowances for housing, care and other in-kind benefits depending on the characteristics of the recipient family structure. [1] As of 2016, the amount of guaranteed minimum monthly income for a single individual is €480, with each additional adult increasing a family's GMI by 0.5 (€240), and each additional child increasing the amount by 0.3 (€144). Housing allowances are provided to certain recipients who are renters or who face difficulties in making their mortgage payments, with allowance amounts varying according to regional location and the size/structure of the recipient unit. [1] Other allowances include home care (up to €400 per month), day care (up to €137 per month), residential care (€625 to €745 per month), respite care, and child care (up to of €102 per month)[1]. With certain exceptions, claimants of the GMI program must typically be at least 28 years old, citizens or permanent residents, legal residents for at least five years, unemployed or low-income, and in possession of assets totaling less than €5,000 in movable property and less than €100,000 in immovable property. [1]

In terms of its outcomes, prior to its taking effect, one review of the system found that, under the assumption of full take-up, the scheme is, while expected to have a negligible impact on the incidence of relative poverty, is expected to have a considerable impact in reducing the intensity and absolute nature of poverty. [1] These and other statements generally comport with Cyprus' initial aspirations that, "The GMI will provide assistance to those who do not have sufficient income to cover basic needs, thus effectively expanding the coverage of public assistance, while remaining within the budgetary envelope.” [2]


Tradeoffs

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Tradeoffs of implementing this policy may include:

  1. Reduced productivity among higher income-earners, as the returns for their labor decline due to higher marginal tax rates.
  2. Increased emigration rates among higher income-earners who are able to leave the jurisdiction for another with lower marginal tax rates, allowing them to retain a greater share of their income and accumulate greater wealth.
  3. Reduced productivity among lower income-earners, some of which may choose to accept their guaranteed minimum income payments rather than pursue more productive, higher-earning activities such as educational attainment, job-seeking, and greater hours dedicated to labor.
  4. Increased social tension between individuals who are net beneficiaries of government and those who are net contributors to government.
  5. Greater relative fiscal cost and policy inefficiency of guaranteeing the entire difference between current income and minimum income, as opposed to policies like earned income tax credit programs, which match income earned at declining rates and therefore still provide some incentive to increase income up to and beyond the minimum threshold.
Compatibility Assessment

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If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Is the jurisdiction experiencing high levels of income inequality?
  2. Do high income-earners face barriers to emigration from the jurisdiction, such as possessing single jurisdictional citizenship?
  3. Is it feasible to tax high income-earners at rates that will be sufficient to allow all eligible residents to attain the minimum income threshold?
  4. Are other policy measures, such as increased minimum wage requirements and earned income tax credits, infeasible or otherwise less economically efficient?
  5. Is the provision of direct income, rather than safety net benefits (such as public housing, government health care, or free education), likely to result in more economically efficient outcomes?
Design

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Assuming that a jurisdiction has decided to adopt the policy, the following questions will need to be answered when determining how to implement this policy:

  1. What amount of minimum income will be guaranteed?
    1. In Cyprus, as of 2016, the amount of guaranteed minimum monthly income for a single individual is €480, with each additional adult increasing a family's GMI by 0.5 (€240), and each additional child increasing the amount by 0.3 (€144). [1]
  2. What eligibility requirements or standards will apply for potential beneficiaries?
    1. With certain exceptions, claimants of the Cyprus GMI program must typically be at least 28 years old, citizens or permanent residents, legal residents for at least five years, unemployed or low-income, and in possession of assets totaling less than €5,000 in movable property and less than €100,000 in immovable property. [1]
    2. Most countries with GMI systems also include various program provisions designed to reduce public assistance dependency and promote employment. Examples of such provisions may include financial elements (e.g., income exclusions or tax incentives), demanding elements (e.g., time limits and job-seeking requirements) and enabling elements (such as job training or education). [1]
  3. How will individuals and families be "means-tested," or assessed for eligibility?
    1. In general, a beneficiary unit (such as a family) will have its actual income and characteristics, such as those reported on a tax return, compared with the guaranteed minimum income amount and eligibility criteria.
  4. How will existing public assistance programs, which may overlap with or be replaced by the benefits of a guaranteed minimum income program, be impacted?
    1. In the case of Cypress, the creation of the new GMI system was designed in significant part as a cost-saving measure and was effected simultaneously with the phasing out of duplicative public assistance programs. In their place, in addition to the basic GMI, the GMI system also provides cash allowances for individuals with certain or varying need levels with respect to areas such as housing, dependent care, or work leave. [1]
  5. How, if at all, will the amount of the minimum income level automatically increase over time (e.g., with inflation)?
    1. Often, the GMI amount is calculated based on reference household budgets or a national poverty line, in which case the amount of the benefit will tend to change in accordance with existing national escalators and metrics applied to such standards.
    2. In other cases, a GMI amount may be chained to a formal price index or reviewed on an ad hoc basis as part of political negotiations. For many countries in Europe, austerity measures have resulted in freezes to GMI benefits in recent years.[1]


ADOPTION


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PolicyGraphics
  • Has adoption of: Limited. Although most national governments offer some form of supplemental income or public assistance benefits, only a few promise a guaranteed minimum income, perhaps due to its high fiscal costs, impact on labor incentives and relatively higher generosity compared with alternative policies.
Adopters


STAKEHOLDERS


Supporters

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Opponents

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REFERENCES


Research

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  • The Cypriot GMI scheme and comparisons with other European countries (2016). Koutsampelas, Christos. Cyprus Economic Policy Review, Vol. 10, No. 1, pp. 3-26. This article studies a 2014 reform in which Cyprus substituted a guaranteed minimum income program for its existing system of public benefits. In general, it finds that the reforms led Cyprus towards a more modern and efficient system while also identifying areas to improve the administration of the program.
  • The redistributive impact of the guaranteed minimum income programme in Portugal (2004). Rodrigues, Carlos Farinha. Instituto Superior de Economia e Gestão - DE Working papers 9-2004. This study evaluated a guaranteed minimum income program implemented by the Government of Portugal, finding that, among other things: 1) only 72 percent of families eligible for the program were actually receiving benefits; 2) the program had a slightly positive impact on reducing inequality; and 3) the program had more significantly positive impacts on reducing poverty and, in particular, the degree of poverty.
Resources

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Footnotes
  1. 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 The Cypriot GMI scheme and comparisons with other European countries. Koutsampelas, Christos (2016). Cyprus Economic Policy Review, Vol. 10, No. 1, pp. 3-26.
  2. 2.0 2.1 Cyprus: Letter of Intent, Memorandum of Economic and Financial Policies, Technical Memorandum of Understanding, and Memorandum of Understanding on Specific Economic Policy Conditionality (European Commission)." Submitted to the International Monetary Fund on August 29, 2013.
  3. European Minimum Income Network country report - Austria (2014). Martina Kargl, Robert Rybaczek-Schwarz and Barbara Zach. Austrian Anti-Poverty Network and University of Applied Sciences St. Pölten, November 2014.
  4. European Minimum Income Network country report - Estonia (2014). Leppik, Lauri. Estonian Anti-Poverty Network, October 2014.
  5. European Minimum Income Network country report - Poland (2014). Szarfenberg, Ryszard. European Anti-Poverty Network - Poland, November 2014.
  6. The redistributive impact of the guaranteed minimum income programme in Portugal (2004). Rodrigues, Carlos Farinha. Instituto Superior de Economia e Gestão - DE Working papers 9-2004.
  7. European Minimum Income Network country report - Serbia (2014). Vuković, Danilo. European Anti-Poverty Network - Serbia and and SeConS. October 2014.
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