Priorities for pension reform

Controversies about retirement age may be little more than red herrings to distract attention from far more serious pension problems needing urgent reform. And how are we to interpret our unemployment figures being among the lowest in Europe, when only about 35 per cent of our population is said to be gainfully employed? Could this apparent paradox equate (as in other southern European states) to a large black economy riding on the backs of others who have to pay all their taxes?

Some politicians and union leaders might be wrongly assuming that all workers wish to retire as soon as possible. Our pension rates are so low that a significant proportion of our workers, especially those in higher-paid positions, might much prefer working for some years beyond official retirement age because they’re not only still physically and mentally fit but also because they would wish to postpone the drastic fall in income that our pension system rewards them with. The notion of a two-thirds pension awaiting them, particularly for higher-salaried employees, is a grand illusion.

Worries about future demographics claiming a significantly smaller percentage of working population may not only not materialise (due to immigration, particularly from eastern Europe) but should perhaps make us consider letting workers continue in employment beyond official retirement age when both employer and employee are in agreement.

Britain has already legislated this arrangement. Public sector early retirement schemes and “boarding-out” at an early age on full pension for dubious reasons (e.g., “anxiety states”), should be discouraged, as these are nothing short of discriminations against other “normal” pensioners and gainfully employed taxpayers.

Our Alliance recently concluded useful meetings with the Pensions Working Group (PWG) and the Minister for Social Security to emphasise how we see the main priorities for pension reform, namely, improvement of the First Pillar for all current pensions in the immediate future, involving sensible revision of the Maximum Pensionable Income and application of the Guaranteed National Minimum Pension (60 per cent of median national income) to all current pensioners, and not to only “boarded-out” ones.

Talk about a Second Pillar is now fashionable. Although in principle we have nothing against a Second Pillar (occupational/service pension), because encouraging saving for retirement from an early age is a good thing, we have several reservations about the way this is being put forward.

Our public service, certain private companies, and the British services, all had forms of occupation/service pensions (now being called “Second Pillars”). The Social Security Act of 1979 abolished the continued application of Second Pillar pensions in Malta, and those pensioners with uncommuted occupational/services pensions have been suffering the injustice of having corresponding subtractions of their two-thirds pension. Our official statistics show that around 14,000 (almost half of total) pensioners have such reductions to their pension.

Instituting a new Second Pillar, without fully addressing the injustice created when application of previous uncommuted Second Pillars was made illegal, means creating another massive injustice against current (in favour of future) pensioners. Why should a Second Pillar be okay for future pensioners and illegal for present ones?

The government officially recognised, in 2008, the injustice created by the 1979 Act, but has been trying to rectify matters in a minimalist fashion without any compensation for past two-thirds pensions withheld.

In a feature, Brussels Deems Services Pensions Deduction Illegal, of December 15, 2010, The Times’ correspondent wrote that these little piecemeal attempts at compensation “might not be enough as the Commission is now saying all deductions are illegal”.

The stock excuse for delays in improving the First Pillar (to lessen the burden on around 20 per cent of our over 65 year-olds facing poverty levels), and to adequately correct serious discriminations in current social security law, has always been lack of funds. This is nothing short of being economic with the truth.

Official statistics reveal that social security contributions have consistently exceeded pension payouts and, in these past seven years alone, around €350 million of contributions have been siphoned off, via the Consolidated Fund, to be used in other welfare state sectors.

The PWG has repeatedly pointed out the lack of ring-fencing of contributions and the lack of a proper pension fund professionally managed to attain optimal investment results for pension payouts. Our Alliance strongly recommends ring-fencing social security contributions and the setting up of such a pension fund, ideally independently managed, such as, by the Central Bank, in the very near future.

If we’re challenged on the economic feasibility of our recommendations, we are confident we can offer further suggestions on how our fiscal system might need reforming.

Prof. Cilia-Vincenti is chairman of the Alliance of Pensioners’ Organisations