Sharpening the skills of persuasion

The survey carried out by Professor Mario Vassallo, reported in The Sunday Times of March 19, clearly shows that the respondents were overwhelmingly against the pension reform. Professor Vassallo interpreted this as lack of research on the part of...

The pension proposals were also rejected by a number of organisations, including the Labour Party (going by what its social welfare spokeswoman, Mary Louise Coleiro, said in public) and by a section of the business community, namely the GRTU - Malta Chamber of Small and Medium Enterprises, which also expressed concern on the increases in the retirement age, arguing that such an increase would be detrimental to many enterprises and small businesses.

There are also people who take the view that the reforms are not necessary and that we are making a mountain out of a molehill. For example, the Leader of the Opposition is reported to have said, some time ago, that he does not see the problem.

It would be interesting to analyse whether the reforms are necessary and why there is such a negative reaction to the proposals.

Are the reforms necessary?

There should be no doubt that pension reform is necessary. There are two related realities in this regard, namely: (a) the number of pensioners has increased and will continue to increase in absolute terms, and more so in relation to the working population; and (b) the current pension arrangement will in a few years' time not be enough to support a decent standard of living.

Regarding the ratio of contributors to recipients, the figures are startling. In 2000, there was one pensioner for every four workers, with the end result that the contribution by workers just about covered their pension. By 2025 there will be one pensioner for every two workers, and the contributions will only cover two-thirds of their pensions.

The increase in the retirement age from 61 to 65 is intended to address this deficit. However, this will not be enough. Suffice it to say that, since the introduction of the present system of pensions, life expectancy has increased by around 10 years. According to my calculations, the retirement age will need to be increased to 70 to balance the accounts.

This of course is not desirable, and other remedies will need to be sought. Increasing the number of years of contributions and ushering in the second pillar of "funded pension" are two such remedies.

Figures relating to the purchasing power of the current pension are also startling. The maximum pension is currently capped at around Lm4,500. Within a few years, senior citizens depending on their pension as the only or major source of income will be living in relative if not absolute poverty. The proposal that the maximum and minimum pensions should increase is intended to avoid this danger. The introduction of a self-funded pension is likewise meant to provide additional income without increasing the burden on public finances.

There is no escaping these two realities and, unless the system is reformed, Malta will end up with: (a) a large shortfall of funds to support the pension handouts; and (b) a significant section of society living below the poverty line.

I therefore believe that the government's decision to reform the current pension regime was a brave one, and that the proposals go a long way in meeting the challenges. I think, however, that the proposals need to be fine tuned and accompanied by educational schemes to promote active aging, as I will explain below.

Why are people against the reform

In spite of the realities just outlined, support for the proposed changes is weak. Why are people against the reform as proposed by the government? I attribute this to four main factors: lack of understanding of the gravity of the situation; short-sightedness on the part of younger people; lack of trust in the government; and fear of funded pension schemes.

1. Lack of understanding of the gravity of the situation

As I have already explained, there are people who do not see the point in changing the current pension system. Although many understand the demographic and fiscal realities, they somehow do not connect this with the need for pension reform and wonder what all the fuss is about. Others do not understand what the government is actually proposing. The calculations that underpin the pension reform are somewhat complicated, and many people are genuinely confused as to what is in it for them.

2. Short-sightedness

It is well known that many of us, especially the younger generation, take a very short-sighted view of reality. This occurs principally because a present value is perceived to be much higher than a future one; that is, there is more value attached to a good if it is available now rather than in, say, 20-years' time.

This may result in "pension myopia", meaning that one will not voluntarily save enough to generate one's pension. Ask an average young person what will happen to him/her when s/he reaches pensionable age and the likely answer is "that's too far away for me to think about it".

In fact if younger persons are given the option "not to save" for their pension, many will probably do so. The end result will of course be that society will have to look after many destitute older people. In fact, from Professor Vassallo's survey, it appears that many respondents were even against a government-funded scheme, presumably arguing that it is better that "we will cross our bridges when we come to them" or that "in the long run we are all dead".

3. Lack of trust in the government

Professor Vassallo's survey suggests that a good proportion of the respondents harbour some sort of distrust in the government. Such mistrust is based on several premises, including: (i) the ministers often put their interest first; and (ii) the government is more interested in bridging the fiscal deficit than in the welfare of pensioners.

Only 10 per cent of the respondents to Professor Vassallo's survey thought it was fair that ministers and the President should enjoy a privileged pension. This would seem to suggest that these respondents think that there is an "I'm all right Jack" attitude by the government, and that ministers and MPs will be spared any disadvantages that the reform might usher in.

I am not arguing that this is true, and I believe that the government's proposals stem from a real concern about the sustainability of the present regime, but I know that many harbour distrust in what government politicians propose, especially in matters related to government revenue.

Others believe that the government is giving much more importance to budget considerations than to the welfare of pensioners. They think that the welfare of the people should come before the budget. Again, short-sightedness often prevails in this regard because the welfare system cannot be sustained without a healthy balance on government finances.

4. Fear of funded pension schemes

There is also a great deal of apprehension on the so-called second pillar of pension reform, namely a funded pension scheme. People are often suspicious that the motives of private investment companies are essentially to make a profit and that it does not take that much for a private company to declare bankruptcy.

There is therefore widespread concern that forcing people to save and letting the private sector invest these savings involves too much risk. The benefits often cited on private pensions, namely that they help develop the domestic capital markets, does not impress the ordinary man in the street.

It should be noted here that a funded scheme requires that individual savers be capable of making wise investment decisions, and if such a scheme is not thought out properly, there could be many losers in this game.

Some countries have successfully introduced funded schemes. The scheme introduced in Iceland - a country with a smaller population than Malta's - could serve as a model on what needs to be done in this regard. In that country, the social partners play an active role in supporting this "second pillar" of pension reform.

For the second pillar to obtain the necessary support, people should be reassured that the risk will be adequately managed, and in this regard it may be necessary for the government to provide an ultimate guarantee to the system. One could legitimately ask the question, in this regard, as to why private enterprise should be involved in running the second pillar, if the government is to remain the ultimate guarantor.

The main reason for involving private enterprise is that the private sector generally operates more efficiently and that the public sector may not have the appropriate expertise to obtain the best return on investment. However, as already hinted, stringent supervision and regulatory arrangements will need to be in place to avoid abuse.

Sharpening persuasion skills

I am one of those who believe that a pension reform is necessary and that the government is on the right track in: (a) increasing the minimum and the maximum pension; (b) increasing the pensionable age and the number of years for entitlement to a full pension; (c) laying the seeds for a mandatory funded pension; and (d) allowing persons to obtain "pension credits" for training, and child-bearing and rearing.

However, the proposals need to be fine-tuned, and more consultation is needed to inform the people on the need for such reform and to persuade them that the government is honestly putting the welfare of pensioners first and foremost.

The government should sharpen its tools of persuasion to put the people's mind at rest that the primary motives for a pension reform are: (a) to ensure that workers have a decent pension when they retire; (b) to maintain the ratio between pension contributions and pension receipts in a manner that can be sustained over the long term; and (c) to ensure that saving for a pension does not involve too much risk.

Active aging essential to a solution

There is a need for fine tuning on a number of issues in the pension reform proposal, which I am sure can be dealt with in the coming weeks within appropriate technical fora.

At this stage, I would like to focus on one particular issue, which I feel is key to the reform in the pension system. This is the need to enhance the compatibility between aging and an active role in society.

Demographic developments and aspirations for a better standard of living make it essential for workers to continue working for a longer period of their lives. The government's proposal in this regard is to effect a gradual increase, which will fully affect only those below the age of 45. It is however also true that, for society to reap the benefits of this change, those who will continue to work beyond the age of 61 will need to do so productively and to be perceived as valid contributors to the Maltese economy and society.

Otherwise, there will be the risk of retaining members of the workforce with lower motivation and possibly outdated skills, effectively lowering the rate of productivity in the economy and possibly curtailing employment possibilities for younger workers.

It is thus essential to complement the increase in the statutory retirement age with programmes and schemes intended to further lifelong learning, thereby enhancing the potential of the experiences acquired by older workers through the use of new skills and technologies.

Genuine efforts are called for to change the mindset of the population, whereby retirement is viewed as a reward to be obtained after a lifetime of toil and strife. Rather, the mindset should become one where the individual remains active, in one way or another, for the whole of a lifetime. Dependency should not be viewed as something to be aspired to. Retirement would mark a point of transition from a fully active working life to a situation where the person can dedicate a larger portion of time to other activities, which would however still allow the individual to be a contributing member of society.

Within this context, such flexibility should be possible earlier on in the working life. As age progresses, competencies change and it should be possible for workers to switch between activities so as to reflect changes in physical and mental conditions that inevitably occur with age. For example, there is the need to find ways to increase the retirement age to manual workers (such as construction employees) without expecting them to remain actively involved in strenuous labour.

It is thus essential to be prepared for the inevitable increase in the working life by adequate informational and educational schemes and campaigns, as well as concrete changes, in working practices to facilitate the transition to an older working population.

This will produce not only economic returns, but also benefits at the individual psychological level where people will feel that they can continue to contribute actively to the economy, and to derive satisfaction and respect for doing so, even in old age.

These conditions would also enable older workers to accept reforms less grudgingly or, better still, more willingly, as they would feel that they are sufficiently equipped and empowered to face the new environment.

Professor Briguglio is head of the Economics Department of the University of Malta.