Time is pressing for pension reform

Yet again, Malta has been warned by the European Commission about the unsustainability of the pension system. Although much work has gone into the mechanics of how the island could get to grips with the problem, the Administration has been slow in carrying out the required reforms. And with a general election now fast approaching, it would seem politically unlikely for the government to act on the principal recommendations that have been so often made, that is, the introduction of the second pillar or, if this is difficult to do now, the third pillar.

The European Commission has not been the only voice prompting the government to act on this sensitive issue but, as is the case with similar pleas for reforms in other sectors, particularly the health service, the government has, so far, chosen to drag its feet. Or, maybe, it has been so overwhelmed by other economic problems, not to mention recurring internal difficulties, that it had no energy left to handle such an important reform. Paradoxically, however, it did find time to tackle (badly) the transport service problem.

The urgency to defuse the pension time tomb is immediately realised when considering that expenditure on age-related benefits, particularly pensions, amount to 21.5 per cent of the island’s gross domestic product.

The warning that the Commission has made this time round is more serious than those it has been making over the past years. Malta, it says, will be facing “severe consequences” in the years to come if it does not accelerate the pension reform.

In the absence of a well-defined plan to go ahead with the introduction of the second pillar, or, if the conditions are not right for this, the third pillar, one wonders whether there are any ways in which the first pillar could, in the meantime, be made sustainable?

Employers argue that the first pillar should be reinforced by a higher activity rate in the labour market, which could be brought about through various measures, such as greater flexibility in the workplace. But, clearly, this would not be sufficient to make the system sustainable, a point that is also raised in the report of the pensions working group that has just been published.

What can, perhaps, strengthen the first pillar is the collection of part of the outstanding revenue due to the government and a rigorous clampdown on tax evasion in its many forms. But is there the sufficient will and the required ability to do this?

Resistance to the introduction of the second pillar is generally attributed to the impact it could have on the economy. However, the pensions working group is suggesting that a decision on the introduction of second pillar pensions be made by the end of the year and that this ought to be followed by an eight-year transition period.

Clearly aware of the negative reaction it could get from employers if it were to decide on the second pillar now, the government set out to calm nerves in no time after the publication of the working group’s report. It assured stakeholders that it would not be implementing any of the group’s recommendations before consulting them.

Well, it is not difficult to see that, despite all the warnings that have been given by the European Commission, the International Monetary Fund and others, the way forward is not going to get any easier. However, stalling the process means that the problem can only get bigger.