Friday’s Malta Financial and Business Times/Radisson SAS Business Breakfast saw Family and Social Solidarity Minister Dolores Christina, Opposition Shadow Minister for Social Policy Dr Karl Chircop and Professor Edward Scicluna discussing the issue of reforming Malta’s pension system.
Economist and former Malta Council for Economic and Social Development Chairman Professor Edward Scicluna opened the seminar, calling for the enlisting of foreign experts to lend a valuable helping hand.
Addressing the full house assembled, as warranted by the subject matter up for discussion, Family and Social Solidarity Minister Dolores Christina called upon all political parties to put aside issues of partisanship, to lay down the battle axes and to construct a meaningful dialogue for the benefit of the country as a whole.
She also addressed the tenets for pension reform in Malta, explaining, “The system of retirement pensions in a country is expected to address the issue of income generation in old age in a manner which is economically efficient and sustainable, socially equitable, and transparent.
“There is a widespread notion that the system of pensions in Malta will fail to meet these objectives in the near future. This is because it operates on a Pay-As-You-Go (PAYG) system whereby pension benefits are financed out of contributions in concurrent periods. As the population is rapidly ageing, the system could face financial difficulties as contribution revenues will be insufficient to cover benefit expenditures. This would lead to a possible increase in contribution rates, effectively increasing costs of production in the economy, the lowering of pension benefits, with important consequences on social equity and on political stability, or higher fiscal deficits, which would threaten the long run sustainability of the economy and the achievement of commitments arising out of EU membership.
“It is to be further noted that the present system entails an in-built element of capping of pension benefits and contributions, which may hinder it from providing adequate pensions in future.”
Maltese demographics and economic development
Mrs Christina explains, “Before the 1940’s both birth rates and death rates were very high in our country. After the Second World War, however, death rates began to decline considerably, in part reflecting the large fall in infant mortality rates. Birth rates did not adjust at once to this last development, with the result that Malta’s population expanded sharply, leading to high unemployment levels and, in turn, to the last big emigration drives of the 1950’s and 1960’s. After this ‘Baby Boom’, however, the birth rate declined steadily, to such an extent that at present it stands at about a third of its level in 1950. At the same time, life expectancy started to improve as a result of increased economic prosperity and better access to health care.
“Thus when in the early decades of this century, the Maltese ‘Baby Boom’ generation starts to reach retirement age, our country will have to support a larger proportion of elderly who will live longer than their predecessors. The number of persons aged over 60 is expected to rise by nearly 40,000 to 103,000 in 2020, representing a quarter of the Maltese population. Meanwhile, due to the decline in birth rates, the working-age population will drop slightly from its present level. According to these demographic projections, the support ratio – the number of persons of working age to the dependent population – is set to fall from just under 4 at present, to slightly above 2, by 2020.
“This process of population ageing is expected to have wide-ranging and long lasting economic effects, involving not just government revenue and expenditure, but also national saving and investment, as well as the labour market, and consequently economic development. Economic policy-makers must adopt appropriate fiscal, monetary, and supply-side measures to face the challenges posed by population ageing. This will no doubt involve making choices, some of which may have unpleasant consequences in the short run but which are essential for long term economic development.”
Wrapping up, Mrs Christina summarises, “The sustainability of pension systems involves a number of facets, chief among which is the fact that its cost to public finances should not be excessive. Ideally, the pension system would be financially self-sustaining. In order to achieve this, it is essential to have a high level of employment and to encourage labour participation, particularly of women and older workers, to partially offset the effects of population ageing on the balance between the number of workers and the number of retired persons. The use of funded pensions is often viewed as a good approach to foster financial sustainability in the wake of population ageing. This is because under funded schemes, pension income would be paid out of past savings made by pensioners during their working lives. This could provide a better guarantee of sufficient funds to cover pension payments compared to the levying of contributions out of a declining work-force.
“The modernisation of pension systems calls for pension systems to encourage flexibility in the labour market by permitting mobility between occupations and countries. It also implies the need for gender equality in pension systems. Transparency of the pension system is another essential requirement in this regard, implying that the system should be straightforward and easy to comprehend and actuarially fair. In other words, pensioners should get a reasonable rate of return in terms of pension income for the contributions that they had effected during their working lives. Pension systems should also be adaptable, in the sense that they should be flexible enough to cater for different needs and preferences of different individuals.
Light shed on World Bank findings
Prof. Scicluna comments, “Pension systems exist in more than 100 countries around the word. International organisations such as the EU, the OECD, and the World Bank keep a tab on all of them, warts and all. Is there any harm in seeking their opinion and use their best brains? Why do we need to feel inferior for consulting with them, private industry does it on a daily basis?”
The World Bank Report on pension reform, he points out produced significant findings Malta had no clue of before.
He goes on to detail the findings:
“Firstly, a two-thirds pension, like a pyramid scheme (my words not theirs) is a reality for the relatively few current beneficiaries, but a pie in the sky for the rest. Even with today’s favourable demographics, because the 1997 system has as yet not matured only 66 per cent of the males over 60 receive 2/3 pension, for females the pension goes to 19 per cent. Can you imagine if it were truly universal today what the cost would be to the current workforce?
“Secondly, our current 2/3 pension system is a mirage. The catch in the system, which is buried in the small print, is the maximum pension. The system everybody is afraid to touch, guarantees that with its present set of rules if left untouched, will provide pensioners with 40 percent of the national average wage in 20 years’ time as against 52 per cent as at present. In 50 years time our untouchable pension system would pay out under 20 per cent of the then current average wage.
“This is because pensions will hit the cap on maximum pensions which in turn is linked to the ceiling on income subject to contributions, and which in turn is indexed to COLA which in turn is lower than the RPI. Some would say at this point that by then future ministers of finance surely intervene and correct this anomaly and ensure the promised 2/3. But where from will these ministers make up the resulting shortfall. If today we have problems with an eight per cent shortfall between (pensions) revenues and expenditure, can you imagine what the problem will be with 73 per cent shortfall.
“Thirdly, even our own latest draft reform proposal (including the gradual raising of the retirement age to 65, and increase in contributory period, amongst others) as submitted to the World Bank is only sustainable over the medium term future but completely unsustainable over the long to the very long run future with expected deficits of six per cent of GDP due to pensions alone.
Fourthly, economic incentives and economic growth repercussions of our proposed schemes, which are some important for Malta to converge at some time in the future with the EU income average, were completely ignored. The system is said to be economically inefficient. Worse the present system is regressive. It favours the top wage earners more than the lower wage earners.”
However, Prof. Scicluna is quick to point out, these recommendations are just a few among a myriad of possibilities. “We need to come down to a workable sustainable package. If as a workforce employers and employees are expected to pay about 12.5 per cent of the wage into a system, achieving a payout of 25 per cent of average wage is the maximum one is expected to reasonably get. We just cannot start all over again from the beginning- as I suspect each social partner would like - and hope to arrive anywhere different. Magic does not come into the equation.”
From a pay as you go system to a multi-pillar approach
Taking the podium, MLP shadow minister for social policy Dr Karl Chircop advocated an overhaul of the current pay as you go system.
He explains, “Our present pay as you go system must be reformed and many advocate a funded approach. I myself was more enthusiastic about this approach till I saw how quickly the market crashed and since then I cannot not help observe numerous international financial scandals which hit the international headlines day in, day out. Scandals which resulted in workers having their pension funds robbed by greedy executives.
“We must thread carefully in this direction to make sure that those who cannot afford a second funded pension are still able to have a basic minimum income. I personally would like to see that workers who pay into funded private schemes or occupational pension schemes are protected from the results of bankruptcy of their pension funds. This has to be done in a way that does not allow pension fund managers to shirk off their responsibilities as I do not believe that Government should act as a insurance for private funded pensions as otherwise there is no point in going private.
“May I suggest that it is also possible for government to set up its own fund so that the extra National Contribution hikes paid in by today’s 25 – 45 year old workers could be directed towards their own pensions, when the ratio of workers to pensioners is likely to go down from 4:1 to 2:1. Finally the government needs to strengthen regulations and supervision of insurance companies and the securities market to ensure solvency of intermediaries, fairness in transactions, and to improve protection of small investors’ rights.
“If the government increases its revenue from contributions paid by our workers without adequately providing for their old age pensions, then these will suffer a huge social injustice. They will be paying more out of their earnings for their pension to finally get a much reduced pension. They could get as little as 25 per cent of the average wage as a pension as is also reported on the World Bank Report Section 4.07. If this age group is not protected than that would mean that this generation would be paying for the excesses of the generation before them when the slogan of Government was after all ‘Money no problem’.
“Those of my generation must be vigilant that any additional contributions will be directed to their pensions and not to pay past excesses and deficits. For a system to be fair and equitable all must pay a fair price and burdens of the past should not be pushed onto future generations.
“As main spokesperson on pension reform I pledge that welfare reform will be tackled by the Labour Party with these main policy considerations in mind:
The present level of pensions and welfare should not be diminished nominally or in real terms. In fact in our European Elections manifesto we have already guaranteed that we will definitely safeguard this system.
“Any reform proposed has to be shouldered equitably so that those categories in society that are already below the minimum level of standard of living , will continue to be assisted to reach the required social threshold , and subsequently these are to be excluded from shouldering any responsibilities while they still live below the minimum levels of survival . Obviously it will be the duty of any administrator to ensure continuing social investment and in this way help these social groups to become independent as quickly as possible. The rest have to shoulder the weight of said reforms equitably and fairly.
“Finally the whole exercise has to be complemented by sound fiscal and economic policies.”
More on Friday’s meeting and the pension reform issue in our sister paper, The Malta Financial and Business Times, on Wednesday.
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