Decisions today to safeguard tomorrow's pensions - Cristina

Social Solidarity Minister Dolores Cristina insisted yesterday that the government needed to act now to ensure the sustainability and adequacy of pensions well into the future.

Introducing the debate on a Bill to reform the pensions system, Mrs Cristina said this bill represented courageous decision-making by the present government.

Over the past 10 years the country had seen a steady stream of studies on the pension system and the bottom line was always the need for urgent reform.

It would have been easy for the government to say that since no problem existed at present, the issue could have remained on the back burner but that would have been irresponsible and a disservice to the people. While it was true that the pensions problem would be felt in 20 years' time, action on the solution had to start now if changes were to be gradual and not drastic. The longer it took for decisions to be taken, the more acute the problems would be to future pensioners, Mrs Cristina said. The status quo was not an option for this government.

The need for pension reform was shown by the fact that Malta, like other developed countries, had an aging population and as the years rolled by, there would be fewer workers who would meet the rising pensions bill. The number of pensioners would rise by 5,700 this year, 1,300 more than last year. One had to be grateful for this, but in monetary terms in 2005 the pensions bill increased by Lm7 million.

Mrs Cristina praised the Pensions Reform Working Group, headed by David Spiteri Gingell for its work leading to the publication of a White Paper in November 2004 and the subsequent consultation process and analyses.

They included economic and social assessments, a survey of public opinion, a study on second pillar pensions, the impact of raising the retirement age, incentives for more women to go out to work and the use of property as part of investment in pensions. The working group presented its final report in June last year.

Going into the provisions of the Bill, Mrs Cristina said it was important to point out at the outset that this reform would have no impact on current pensioners and their pensions were guaranteed.

One of the main measures of this Bill was the gradual raising of the retirement age to 65. Those aged 55 next January 1 would see no change and retirement age remained 61, but women who wished to continue to work to 61 could not be denied this opportunity.

Those who on January 1, 2007 were aged between 52 and 54 would retire at 62, those aged 49-51 would retire at 63; those aged 46-48 would retire at 64 and those who were younger would retire at 65. Mrs Cristina noted that most European countries had already decided to raise retirement to 65 and some were even considering extending it further.

The consultation process showed that while many agreed that the retirement age needed to be raised, some argued that the increase should be voluntary or some manual workers should be excluded. The government was conscious of reality, including advances in technology that made manual work easier, but it had left open the opportunity of early retirement if certain conditions were met. People currently under 45 would be able to retire before reaching 65 but after turning 61 if they paid social security contributions for 40 years and as long as they did not take up another job.

The government would, however, help people who retired early because they could not work. That was why the invalidity pension reform was announced earlier this year. That reform ensured that only those who really could not work retired, and these people who find financial help, care and retraining, as necessary.

In terms of this Bill, the number of social security contributions required for the two-thirds pension would rise gradually from 30 to 40 years and there should be no discrimination between the self- employed and employees. This too would not affect those aged 55 next January 1.

Mrs Cristina said the government did not wish to discourage people from studying, even if this meant starting work late and therefore starting to pay social security contributions at a later date. Proposals to safeguard those who continued their studies would therefore be announced in the Budget.

Furthermore, as at present, workers would continue to be able to settle unpaid social security contributions going back five years. However those who were aged 45 or less would in future be required to pay up at current rates and not the rates that were in force when the contributions were due.

Turning to the calculation of the two-thirds pension, Mrs Cristina said those who were aged 46 or more next January 1 would continue to have their pension rate calculated on the basis of the best three consecutive years in the last 10 but for younger people their pension would be based on the average of the best 10 years in the last 40. This new system would discourage abuse and instil greater balance between the contributions paid and the pension due.

In terms of the Bill the capping on the maximum pensionable income would also be gradually raised to Lm9,000 from the current Lm6,750 and pensions would eventually be calculated on the basis of the average wage and inflation.

Mrs Cristina said the government acknowledged the role of mothers who stopped working to care for their children. Therefore a parent who stopped working to care for his/her children would have his or her social security credited at the rate of two years per child, rising to four years when a child had disabilities. The condition was that such parents had to return to work and work for an equivalent period as when they were away. This provision applied also to parents aged under 45 on January 1 who already had children. Mrs Cristina said the workings of the minimum guaranteed pension were being changed and would in future be calculated on the basis of 60 per cent of the average median income, thus making this pension more adequate.

Indeed, the government was committing itself in the law to review pensions every five years to ensure that they remained sustainable and adequate. The report would be tabled and discussed in Parliament.

Mrs Cristina pointed out that this Bill also created the legal framework for the introduction of mandatory second pillar and voluntary third pillar pensions. The culture of saving had changed in Malta and elsewhere and people were now saving much less, even when their income was high. The aim of the second and third pillars was therefore to lead people to save.

The government would ensure that such pensions were governed by a strong regulatory regime.

The government was considering financial incentives for third pillar pensions and these would also be announced in the budget when provisions on part-time workers would also be made public, Mrs Cristina said.

The opposition's reaction is being reported separately.