Assessing the adequacy of pensions

The Alliance of Pensioner Organisations wrote to the Prime Minister on August 9, drawing his attention to the danger of gauging the adequacy of pensions on the basis of the World Bank’s formula. According to the bank, a pension of 40 per cent of the average wage is the minimum acceptable. Implicitly, the alliance was asking what formula the government was using to assess the adequacy of pensions.

Both the government and the alliance agree that there is no accepted international benchmark which establishes what would be an adequate income for retired persons. Also, both are aware that the European Commission, through feedback to its Green Paper, is hoping to clarify this particular issue.

A worrying feature in this situation however, now as in 2006, is that even in the absence of established and widely accepted benchmarks, government spokes­men continue to speak of reform to ensure adequate and sustainable pensions.

Does such a phrase have any meaning in such a context? And not only just at the level of the minimum pension!

This is not to say that nothing should be done until the European Commission reveals the way forward. Marking time is not an option. Let us be clear: The worry of the alliance is not limited to the adequacy of the lowest pension.

Pensions above the minimum are far from adequate as the correlation between pre-retirement and post-retirement income (in at least 90 per cent of cases pensions are the only income) has been broken since 1987.

A standard for establishing an adequate minimum pension already exists in western Europe. The accepted doctrine is that it should not be less than 60 per cent of the national median income. The alliance had proposed the application of this formula in the course of the 2006 pension reform process.

The government accepted the proposal and applied it to persons born on or after January 1, 1962. In other words, a national minimum pension of 60 per cent of the national median income will start being paid to those who retire because of age on or after January 1, 2027.

The government appears to be happy with this arrangement. The al­liance is not. When some mention poverty, the administration is quick to state that the existence of poverty is only a perception. The alliance prefers the reality of statistical facts. And the reality is that 22 per cent of older persons, approximately 19,000 men and women, are at risk of poverty. In fact, about one-fourth of these are already below the poverty line.

Are all these persons, together with those retiring between now and December 31, 2026 children of a lesser God, unworthy of a reasonably decent minimum pension?

A standard to establish what constitutes an adequate minimum pension does exist and the government recognises its existence in a legal enactment. Why therefore wait until 2027 to apply it to all pensioners? Could it possibly be money? When a state is able to spend millions of euros every year on ill-prepared and badly implemented projects, being parsimonious with the aged and the needy goes down badly.

How can one gauge the adequacy of pensions above the minimum? While there is no widely accepted formula to assess the adequacy at various levels, a less precise but satisfactory result is achievable.

While a retired person cannot expect to maintain exactly the quality of life s/he used to enjoy while economically active, neither should s/he end up merely existing. So there has to be some correlation between pre- and post-retirement incomes. It must be kept in mind that the lower the pre-retirement income, the greater the reliance on the state pension as the only source of income.

This equation is indicative and imprecise in numerical terms. Greater precision can be attained by looking at the occupational pension arrangements of EU bureaucrats and of ministers and MPs in most, if not all, EU states. These certainly must be adequate and so a gauge does exist.

In the case of Malta, this can be further supplemented by looking at the ratio between scale one and scale 20 in the public service. The ration is 4.2 to 1. If over time, the same ratio is applied to the contributory state pension scheme, most problems would dissolve.

Mr Tabone is chairman emeritus of the Alliance of Pensioner Organisations.