One of the proposals in a report by the World Bank on pensions in Malta is to target the pension to two-thirds of the net rather than the gross wage.

The report, which was given to social partners at the Malta Council for Economic and Social Development a few weeks ago, makes a number of other proposals that include raising the retirement age to 68 by 2072 and basing the pension on lifetime earnings rather than the best three of the last 10 years for employees and the average of the last 10 years for the self-employed.

The report, a copy of which has been seen by The Times, also suggests that for one to be eligible for a full pension, one should contribute for 45 years, not 30.

It also proposes the introduction of a mixed system in which people continue to pay to the current system as a funded savings plan is introduced.

"The mixed system raises benefit rates significantly without adversely affecting labour competitiveness," the report says.

The report, entitled The Maltese Pensions System, An Analysis Of The Current System And Options For Reform, was drawn up by Anita Schwarz, Alberto Musalem and Tatyana Bogomolova.

It says that the pension system in Malta moved from one stage of social security provision to the next. "The pre-1979 system, while not funded, was much more focused on poverty reduction, through the national minimum pension, with income replacement above and beyond the poverty level left to occupational plans. In 1979, the movement to a two-thirds pension changed the focus to income replacement.

"Like many countries, Malta is reaching a point where the pension system needs to be seriously revisited to ensure that it can provide adequate and fiscally sustainable benefits for workers in future," the report says.

It notes that as in other high-income countries the overall male labour force participates in contributing to the pension system. About 90 per cent of the male labour force pays pension contributions. But unlike other countries, where women return to work after their childbearing years, in Malta most of the women who drop out of the workforce appear to remain outside in later years as well.

Unless a reform is carried out, because of demographic and other changes, revenues will only pay 27 per cent of expenditures, compared to 92 per cent today.

The report notes that the way the pension system was designed in Malta had a number of disincentives for people to keep paying their contributions after 30 years and it seemed that many were claiming invalidity to get their full pension early.

This is because the pension system allows individuals to accumulate a two-thirds pension after 30 years. The average length of service in Malta is 38 years at retirement and workers who begin contributing at the age of 20 can have a full pension at the age of 50. As there is no additional pension accrual during the last eight years of contribution, people claim invalidity. Invalidity rates in Malta rise dramatically from about four per cent after the age of 50 to over 10 per cent by the age of 56 and close to 16 per cent by the age of 59.

The report notes that self-employed people pay a contribution of 15 per cent, which is not tax-deductible. Neither the contributions from employees (10 per cent) nor the 10 per cent paid by employers are tax deductible. On the other hand, the self-employed receive the same benefits as employees while contributing a lower overall amount.

To correct this distortion, the report recommends that the contribution rate for the self-employed be increased to 20 per cent, the same as employees and employers together, and that 50 per cent of that would be tax deductible from income taxes, which would result in equivalent treatment to that of employees.

The report also recommends that all contributors should receive benefits proportional to their period of contribution, even if this is very small, as otherwise people working for short periods might be tempted not to contribute at all.

Contributions by part-time workers should also be commensurate with their earnings. As things stand, the required contribution represents a huge percentage of their earnings.

It encourages a change in the policy whereby earnings above the minimum wage after retirement are reduced directly from pension amounts. Such a policy acts as a disincentive to people working beyond the retiring age and, as the fertility rate is low, people should be encouraged to continue working.

Of all OECD countries, only France, Korea, Slovakia and Turkey have a lower retiring age than Malta. Retirement age in these countries is reached at the age of 60, while in Malta it is 61. In most other countries, the retiring age is 65, while in some Nordic countries it is 67.

Another suggestion is to add a "funded pillar", by taking an additional contribution of about two per cent, by both employees and employers, and to gradually raise this amount to five per cent by 2020. Annual wage increases will be more than sufficient so that there will not be a decrease in take home pay and pensioners would be able to receive a pension from both the pay-as-you go system as well as the funded pillar.

The pension fund would be centrally managed and would offer two portfolios, one with fixed income securities and one composed of shares. Plan members would be able to construct their own portfolio but, to control for risks, the proportion of the fixed income fund in individual portfolios will increase with the age of the plan member so that as they approach retiring age the share of fixed income would be about 80 per cent.

The fund would be as independent from the government as possible and the board members should be experts in fund management with proven records of integrity.

The report notes that the current pension system "suffers from both issues of fiscal non-sustainability and low pensions in the long run".

"While the pension system in Malta clearly needs reform, multiple options exist which will improve the fiscal sustainability while trying to maintain some level of pension adequacy. The government needs to consider the fiscal issues, the social aspects, labour competitiveness issues as well as institutional design in coming to a decision on how to reform the pension system," the report says.