Pension anomalies

The pension debate has been ongoing for years. More than four years ago a commission was set up to study the implications of pensions on Malta's financial situation. The reason given was that the increasing number of pensioners was considered to be a time bomb that might explode and cause havoc to our financial resources.

Surprisingly, while taking too long to conclude its findings, it is very doubtful whether the commission's report, "Pension Reform Proposals: a framework for discussion", was actually discussed by its members before it was published.

Another much awaited report by the World Bank has finally been submitted to Government and was passed on to members of the Malta Council for Economic and Social Development (MCESD). The constituted bodies are now expected to submit their proposals on this report so that Government will evaluate all recommendations presented to formulate what policy issues really matter and introduce unpleasant measures hopefully based on consensus.

Apparently, however, Government is forgetting that the public does not look too favourably on raising the retiring age. The result of an opinion survey by The Sunday Times showed that only 38% of respondents were in favour of having the retiring age raised to 65.

Yet everybody is fully aware that the growing outlay on pension entitlements has become a problem. Factors contributing to this problem are the considerable increase in life expectancy and the drop in the birth rate since the National Insurance Act was passed way back in 1956.

Initially, national insurance contribution catered for pensions and social services that were limited to unemployment, sickness, injury and other incidental help that was required to escape the poverty trap. To ensure that the fund was sustainable, the money contributed by workers was invested in what was then termed to be gilt-edged securities and regular actuarial reports were prepared to ensure that it was always in the black.

But people are now fully aware as well that political exigencies forced governments to mismanage the pension fund. Governments ignored all previous precautions and, to prove their social conscience, introduced more entitlements under various guises. There was also bragging that 48% of Government's expenditure was allocated to social services.

In addition, abuses in social services have been allowed to creep in, were condoned or tolerated over the years. The declaration of saving Lm11 million from children's allowances payments in the past four years tells all. Just imagine what happened in the past!

It is therefore not surprising that national insurance contributions are not enough to meet the consistently growing expenditure on welfare; and, given prevalent practices, in future the welfare gap will continue to increase to unmanageable proportions. Malta is just reaping the fruits of governments' past management performance.

That may be just the tip of the iceberg. People who know how the system works tend to benefit handsomely. This can be seen in various ways: claims for sickness benefit; requests for boarding out; applications for invalidity pensions. The route to enjoy the sun while having an assured income is actually quite easy to discover, as accountability has lost its meaning.

Of greater significance are the anomalies in the payment of pensions, whether it comes from the Treasury or the Social Services department. Both sources have a common pocket.

The social services pension is capped at Lm4,500 a year; it has been at this level for the past 23 years. Therefore, workers earning more than Lm6,750 a year will not receive a pension equivalent to two-thirds of their salary. Under this category fall all workers in the private sector and those employed in parastatal organisations, including autonomous bodies like the University and other government authorities.

There is another handicap: their pension is calculated over the number of years worked, thereby making their pension rights adversely affected if their birthday falls on the wrong date.

The privileged class is treated differently. But even here there are those who feel deprived of certain privileges. Whereas civil servants' pension is calculated at Lm1 for every Lm540 earned per month, that pertaining to Police and AFM personnel is calculated at Lm1 for every Lm450 per month.

Of course, the most privileged are the MPs. Their pension is based on Lm1 for every Lm270 earned per month. The President's pension is even better as it is allocated at Lm1 for every Lm90 earned monthly.

There are other anomalies in pension rights. A workers' pension is determined on the best three years of the last 10 years of their gainful employment. Self-employed persons get a pension that is based on an average of their last ten years of their earnings. A civil servant's pension entitlement is based on the last day's pay.

Members of Parliament have the facility of grouping various periods of days to make up an additional month of 30 days and may choose any period of five years of parliamentary service to optimise their pension rights.

This privileged status gives ministers' pension the right of revision with every change in their honorarium, even if this occurs annually. Interestingly, there is no capping to their pension entitlement. Thus, whereas former civil servants who have retired before 1979 have their pension rights fixed at pre-1979 wage and salary levels and the social services pension has been capped for the past 23 years, as already remarked, that of MPs and ministers (including ex-office holders and members) is revised every year.

There is no doubt that MPs and ministers enjoy the best of the pension world, in addition to the many fringe benefits they enjoy while carrying out their Parliamentary duties. The lucky civil servants too enjoy a bonanza. According to Legal Notice 18 of 1987 civil servants who retire because of their age limit and are re-employed as consultants, can earn a further payment without jeopardising their pension entitlement. Other workers who receive a social services pension and who may become entitled to more than two other pensions have to forfeit one of them; and if they work they must not earn more than the minimum wage.

Of course, there are more anomalies in pensions. There is a wide bracket of people who are sensitive about this area because, after spending their lifetime working and paying their national insurance contributions, they perceive that they are relatively deprived by not enjoying the same increases as the other narrow bracket of privileged people. They are also concerned when their lifetime savings earn meagre interests because interest rates have been lowered to encourage investments.

It was encouraging to hear former Prime Minister Eddie Fenech Adami and Dr Sant agreeing that MPs' pension rights should be capped. Moreover, the new Prime Minister Lawrence Gonzi, recognised that the social services pension needs reviewing because of its having been capped at the same level for the past 23 years and declared that he wants to maintain a basic safety net, prevent social exclusion and ascertain that future pensions will be adequate for future needs.

Sensibly, before drastic changes are envisaged, it is more important to investigate these pension anomalies and sort them out in such a way as to build the nation's faith in good Government's intentions.

Dr Borda is an economist specialising in the development of small states.