Pensions: Together we can do better

That information overload impairs straight thinking is evident by the way the pensions issue is being treated.

Our government, like many others in the EU, has a fiscal sustainability problem. If Malta really wants adequate and sustainable pensions, we have, first and foremost, to ensure better governance of public money. When VAT was raised from 15 per cent to 18 per cent we were promised that the additional money collected would be channelled into the health sector. Instead, the money ended up in a black hole. In 2010, the government still lacks a transparent accounting system.

The pensions issue is further complicated by an aging population. The EU’s 2009 Aging Report estimates that, ceteris paribus, pensions in Malta will almost double (from 7.2 per cent to 13.4 per cent of GDP) by 2060. The total cost of aging (including additional healthcare for the elderly) will account for an additional 10.2 per cent points of GDP – an expense that we cannot afford unless the government changes its expenditure pattern drastically.

What sort of society is the EU projecting for Malta in 2060? The local population is expected to remain at about 400,000; with the working population falling to 54.9 per cent (69.7 per cent in 2007). Fertility rates will increase marginally to 1.55 (1.38 in 2007) children per woman but will remain less than the natural replacement rate.

This shortfall will be compensated by the continued inflow of migrants, estimated at 800 persons annually (1,000 in 2007). The local economy is projected to grow at one per cent (2.9 per cent in 2007), reflecting an annual growth rate in labour productivity per hour of 1.7 (1.5 in 2007). Labour participation will be 64.4 per cent (59.5 per cent) with female participation rising to 45.1 per cent (presently 39.9 per cent). Reflecting higher life expectancy, the number of pensioners in Malta will rise to 117,000 (68,000 in 2007).

The number of contributors to public pension schemes will amount to just 146,000 (159,000 in 2007).

What is the government’s view on this data? Does it present a worst case scenario, or what? Surely, the public should know before the government passes the bill of its financial mismanagement to us employees. Hopefully, we will get a better picture once the World Bank completes its assignment on pensions. The Alliance of Pensioners’ Organisations has criticised the government for commissioning the World Bank. It was a strange choice indeed. The alliance is arguing that a pension at 40 per cent of the national median income, as determined by the World Bank, is far from adequate. The World Bank is renowned for its lack of a “social conscience”.

Pensions are about savings for the future. If the government wants us to save more, then it should start by removing taxes on savings. At current risk and interest levels, savers are getting a raw deal. For historical and cultural reasons, we Maltese have been big savers. Over the last two decades, significant savings have gone into real estate. Nothing yielded a better return. On a small island, property, and land in particular, will always carry a premium. Dealing with the cost of aging in Malta implies creating innovative schemes that link the real estate market with retirement schemes.

The EU classifies Malta as one of nine high-risk member states in urgent need of pension reform. The 2006 pension reform, whereby retirement age was gradually raised to 65 years (or a minimum 40 years’ contribution), is deemed insufficient. The EU is hinting that, ideally, the retirement age should be automatically linked to life expectancy. This is what Italy has recently done. For the EU, age seems not to be a major consideration in the workers’ ability to perform tasks. Perhaps it believes that its economic strategies have been so successful that we are all knowledge workers now. Still, we will not be able to get an adequate pension.

Why is it that the three-pillar scheme is deemed to be the best solution? In the meantime, the government continues to play for time. Both the World Bank report and the recommendations of the pensions working group will not be finalised before the end of 2010.

The government realises that the state of the economy does not permit further burdens on employees or employers. Many employers are not even managing to cope with present NI payments. Despite the government’s scheme incentivising payment of overdue NI contributions, between May 2009 and January 2010, NI arrears increased from €49 million to €56 million. This represents an impressive increase of €1 million per month.

The government’s tight fiscal position allows it little room for manoeuvring. It will probably initially go for the third pillar (voluntary pensions) seeking to sugar its cost to employees through tax incentives. Whether such a strategy will be acceptable to the EU is to be seen.

Pensions are about the capability of an economy to support a decent standard of living for its citizens, today and tomorrow. If they are not sustainable, adequate and safe then it is an admission that our social and economic strategies are not delivering. Passing responsibility and the financial burden back to employees and employers is not good enough. Together we can surely do better.

fms18@onvol.net