Severe consequences await Malta in the coming years if the island does not accelerate the pension reform started a few years ago, a European Commission report has warned.
With no further policy changes, Malta will not be able to have a sustainable pension system
Malta is expected to be one of seven EU member states with the most “significant age-related increase in public spending”, according to the 2012 Ageing Report, conducted by the Commission together with experts from the finance ministries of all member states.
“It is clear from this study that with no further policy changes Malta will not be able to have a sustainable pension system in the coming years,” an EU official told The Times.
“Although some changes have already been introduced, more is expected from the island,” he added.
Malta’s expenditure on age-related matters, particularly pensions, is expected to increase by eight to 11 per cent of GDP by 2060 from the current 21.5 per cent of GDP.
The dependency ratio – the proportion of people working to those who are not working and need state assistance – will increase by 37 per cent.
The other six countries mentioned in the report, based on scientific projections made until 2060, are Belgium, Cyprus, Luxembourg, the Netherlands, Slovakia and Slovenia.
The report shows that, although employment participation in Malta is set to increase significantly – particularly with more women entering the job market – this will not be enough to make up for the increase of those depending on pensions to sustain them.
The overall number of people working will also shrink as the population ages. The increasing pressure on public finances becomes very evident when seeing the raw figures in the study.
With the island’s population size expected to remain stable at 400,000 people, the number of those working (15-64 years) is expected to shrink by 71,000, to 216,000 in 2060 from the current 286,000.
On the other hand, those depending on a pension (65 years and over) are expected to reach 128,000 in 50 years’ time from the current 85,000 – an increase of 43,000.
The report says these numbers – together with other expected changes such as low fertility rate and an increase in life expectancy of some eight years in the projected period – clearly shows that if no further changes are implemented the situation is not sustainable.
As a consequence, the stress on public finances will also increase significantly. In 2006, after 10 long years of discussions among the social partners, Malta introduced its first significant pensions reform by raising the pensionable age to 65 for both genders by 2026 and lengthening the contribution period.
It changed the calculation of pensionable income from the best three years out of the last 10, to the best 10 years from the last 40.
It also introduced a Guaranteed National Minimum Pension payable at a rate of not less than 60 per cent of the median income for those born after January 1, 1962.
In 2007, the medical review for invalidity pensions was made more rigorous and following the 2008 Budget, pensioners were allowed to keep on working without any reduction in the pension, while paying social security contributions.
However, the Commission has been pushing Malta to accelerate its reform by introducing more changes, including a possible coupling of the retirement age with life expectancy and the introduction of private pensions.
A strategic review of the pensions system was submitted to the government by a Pensions Working Group in 2010, which made 45 recommendations on similar lines as those recommended by the Commission.
Last year the working group was given the task of further consulting constituted bodies, civil society and the public, and recently drew up a report on the outcome for the government’s consideration.
The EU’s latest report highlights the need for further reform across the 27 member states as the ageing problem increases.