The inadequacy of pension rates

According to the Social Security Act, “pensionable in­come” means the average annual basic wage/salary in case of an employed person or the net income or earnings in case of a self-occupied/self-employed person calculated in accordance with the provisions laid down in the Thirteen Schedule of the Act. The pensionable income plays a very important part in the computation of the two-thirds retirement pension.

The law also provides that the rate of pension paid should in no case exceed the two-thirds of the maximum pensionable income (MPI) as indicated by an order published in a legal notice. The order is made by the minister responsible for social policy with the concurrence of the minister of finance and is published in the Government Gazette.

One of the measures proposed by the pension working group in the pension reform for the sustainability of pensions was to change the current format of the MPI. At present there is one MPI applicable to all retirees. But an amendment carried out under ACT XIX of 2006 of the law now provides for three different MPIs linked to the age factor of the person concerned as indicated hereunder.

For persons born on or before December 31, 1951, the maximum ceiling will be increased up to €17,470 (Lm7,500). The figure will be reached by COLA increases awarded yearly.

For persons born between January 1, 1952 and December 31, 1961, the maximum ceiling will go up to €20,964 (Lm9,000). The figure will be reached by COLA increases awarded yearly.

For persons born on or after January 1, 1962, the MPI will be €20,964 plus (Lm9,000 plus). In this case only, beyond 2013, the MPI will be capped at a weighted average of 70 per cent of the wage growth (productivity and inflation rates included) and 30 per cent of inflation rate. At present, the MPI stands at €17,176.

The pension working group may contend that the above change is positive for the sustainability of pension, yet it has failed to justify that the replacement rate on or after retirement will be adequate to pensioners. In cases where pensioners enter the fourth age, their income security will be threatened especially for those falling under the first group.

The idea to create three separate groups and give special attention to persons who were born on January 1, 1962 and after is not popular as it creates distinctions which are discriminatory and fly in the face of the implicit contract entered between the state and the contributor on joining the scheme. It appears that current pensioners, as well as those who will attain pension age up to December 31, 2026, are considered second-class citizens and their rights for a decent living are being restricted.

The measure also goes against the normal applicability of our pension system – the pay as you go – where current workers pay social security contributions to support retired people. It has to be remembered that current pensioners used to pay their dues as workers and always complied with the provisions of law in force at that time. Therefore, to change the goal post at this point in time may result in pushing senior citizens near the poverty threshold.

Consultations are now being carried out between the pension working group and interested stakeholders on the pension reform. It is important for the pension working group to re-consider their position as regards the MPI. It is suggested that the current practice of having one MPI should not be changed and therefore the new conditions proposed for persons born on or after January 1, 1962 should be applicable to all pensioners irrespective of their age.

The arguments are based on the following realities. From the legal aspect, one has to follow the development of the MPI over the years starting from Legal Notice 76 published on August 29, 1980 up to the last LN No. 5 of 2007. From January 3, 1981 up to December 31, 2004, a period of 24 years, the MPI was always fixed on Lm6,750. A legal notice to revise the MPI as from January 1982 to reflect the COLA increase of Lm3 per week for that year was never issued. During the period 1983 and 1986, workers experienced a wage freeze and therefore no increases in the MPI were carried out. In 1987, the new administration stopped the price/wage freeze and, although wages/salaries started to increase, the MPI remained in the freezer. Further on, Malta experienced a prosperous period, yet the MPI remained in cold storage up to 2004.

By coincidence, in 2005 the increases awarded in wages/salaries of certain categories of workers reached the level of capping (Lm6,750). Pensioners who had their pension assessed on the MPI could not be entitled to the two-thirds of the cost of living because they reached the ceiling. Thousands were excluded from an increase due to the fact that the MPI was low. In the circumstances, to ensure that all pensioners become entitled to the two-thirds of the cost of living, the MPI, or capping, started to increase by the full cost of living.

The PWG should consider also that COLA is always computed on the basis of inflation at the level of the minimum wage. The result is that pensioners whose pre-retirement incomes exceed the minimum wage do not even have the value of their pension maintained. The fact that the MPI remained in the freezer for 24 years cannot be ignored.

During this period, there were considerable increases in wages/salaries which were not included in the MPI. The increases in prices for goods and services as well as the energy crisis played an important part towards the erosion of the purchasing power not only to workers but also to retired people.

In this scenario, can we consider that the measures put in place are promoting solidarity between generations? If we agree that the pension working group have carried out their task properly in suggesting measures to maintain the sustainability of pensions, we have to agree too that the problem of adequacy of pensions has been put by the sideline and will come to haunt us in the near future. In the circumstances, where the pension working group has failed to deliver, it is now up to the politician to face the issue and the electorate in about two years’ time.

There are over 80,000 senior citizens ready to pass their judgement not only about the adequacy of pension but also as to whether solidarity and social justice can still be considered to form part of our social agenda.