Retirement age may not need to be increased until 2039

The retirement age will not increase before 2039 and will impact those now not older than 38 if a recommendation of the pensions’ working group, pegging the pensionable age with life expectancy, were to be accepted.

According to the group’s calculations, based on statistics and studies of life expectancy in Sweden, those who were born between 1973 and 1976 will see their pension age rise to 66 years from the present 65 gradually between 2039 and 2043.

Those born between 1977 and 1985 will have their pension age increase to 67 years gradually between 2044 and 2053. In 2054, those who were born after 1986 will see their pension age increase to 68 years.

The group is updating the recommendations it made last December following comments it received during a consultation period that closed last month. It is expected to submit its final report to the government by next month.

The working group was commissioned by the Employment Ministry to carry out a strategic review on the adequacy, sustainability and social solidarity of the pension system five years since the pension reform in 2005.

The working group delved into how people were living longer and suggested that the official pensionable age be pegged to a longevity index through a special mechanism. It said that pensionable age should increase automatically in line with any fluctuations in the longevity index.

In its report, the group warned that further postponement of the introduction of the second pillar “would only exacerbate the issue relating to the adequacy of the average pension replacement rate and thereby require, potentially, more drastic measures in the near future”.

The group suggested the introduction of a voluntary third pillar pension, which gave the individual the possibility to switch funds to the second pillar once that became possible.

The present pay-as-you-go pension is directed at guaranteeing a decent standard of living. The second pillar introduces the principle of self-help whereby workers and employers contribute to private pension schemes to supplement their government pension and enhance their standard of living. The third pillar brings along the principle of choice whereby money is put aside to complement the pension income.

However, in a paper published yesterday on the economic implications of pensions, the Malta Employers Association said the second pillar pension should not be introduced “in the foreseeable future” because of the cost to employees and employers, which could have negative economic consequences.

The MEA said that a stronger participation of the labour force was required to strengthen the first pillar pension. In the medium term, there should be a shift from a purely pay-as-you-go system to a first pillar, which is partially funded.

The present pay-as-you-go system should be reformed to introduce a funded component so that individuals would be paying to sustain their own individual pension. The pay-as-you-go component would continue to support existing pensioners, it said, providing them with a basic standard of living while the funded component would, in the medium to long term, enhance the overall pension package. It recommended that the funded component be managed by the private sector.

It admitted that the transition to the funded scheme would entail a cost to the government but it could be introduced gradually over a number of years to minimise the fiscal impact.

Policies to increase the labour supply were “ineffective or counterproductive” unless the economy was sufficiently competitive to generate productive employment, it said. It added that any attempts to solve the welfare gap by adding burdens on employers, such as through the introduction of second pillar contributions without giving due consideration to the impact on costs and competitiveness, could drive people out of jobs in the private sector.

The MEA said fiscal incentives should be introduced to encourage more people to invest in voluntary third pillar pensions and there should be consensus between social and political forces on the pensions issue to ensure that any reforms would work to improve the welfare of pensioners and in the national interest.

It also made its case in favour of free quality health care saying the issue of pension reform and sustainability was closely linked to the retention of the provision of free quality health care.

“Free health care enhances the quality of life of pensioners and offers reassurance about a basic need to this segment of the population,” it said.