Acting now for the long run
Master economist John Maynard Keynes rebelled against the mid-20th century paradigm which held that, given the cyclical nature of an economy, in due course all problems will be sorted out. His reaction was that “in the long run we are all dead”.
Keynes has now gone out of fashion; short-termism has not. After all, ours is the age of the here and now.
And if we are unable to understand whether our economy in the last six months has been in recession or not, why try to make sense of what may be in 50 years’ time? If, at a time when the world discovers “god’s particle” we Maltese discover “statistical fuzziness”, then, probably, we are close to being brain dead.
Adequate and sustainable pensions in 2060: Why not in 2012? Why not start by seriously addressing present anomalies in our pensions? Is the government really concerned with social solidarity when it has not even bothered to commission a social impact assessment on how the cost of food, energy and medicines are affecting our pensioners?
In the history of a community, 50 years is a relatively short period. We need to act now so as not to risk that our children will be without a “social” safety net just like our grandparents 50 years ago. Only our children are unlikely to have an “extended” family to look after them.
Pension adjustments tend to be costly and need to be introduced gradually to avoid big shocks to our economy and society. The work done by the 2010 Pensions Working Group is valid and sensible, even though it is mostly “inside-the-box” thinking and not daring enough.
The sustainability of our pensions has debated for almost a decade. Following the 2004 White Paper, drawn up by the first Pensions Working Group, the government, in 2007, introduced measures including the gradual rise of the retirement age to 65 and the increase in the contributory pension period from 30 to 40 years. The 2010 Working Group estimates that without this reform the average replacement rate (the income level of a pensioner compared to his/her pay while still in employment) for the PAYG pension in 2060 would have been 18 per cent instead of 45 per cent.
The European Commission is not convinced and the finance ministers’ meeting in Brussels earlier this month reiterated that Malta must accelerate its pension reform. In a White Paper published last February, the EU recommends that Malta should automatically link the statutory retirement age to life expectancy while formulating a comprehensive active ageing strategy. It also urges the government to stop encouraging early retirement schemes and to start actively promoting private pension schemes.
The 2010 Pensions Working Group agrees that additional measures need to be taken to ensure the adequacy and sustainability of local pensions. In its final report, the Group makes over 50 recommendations, the single most important being the introduction of a mandatory second pension.
The PWG says there is no general agreement on the “form and structure” of this additional pension but all stakeholders agree its introduction “today would create considerable social and economic shocks”. The PWG suggests six to eight years is a more realistic time frame.
While acknowledging that further work needs to be done, by the very assumptions made by the 2010 PWG there is nothing to indicate that Malta can afford a second pillar by 2020. So why wait for another eight years? If there is the political will to act, and not just talk, as from the next Budget the government should commit itself that a part of the national insurance revenue will go into the creation of a pension fund to back up the present PAYG system.
Other important measures, like a tax incentive to encourage voluntary pensions (the third pillar) and no taxation on long-term savings, too can be implemented quite fast.
To start addressing the sustainability of pensions in earnest, the government has to be fully committed to ensure that our economy achieves a minimum 2.5-3 per cent annual real growth rate. This is an achievable target for a small economy like ours.
Such a growth rate is achievable if Malta has the right policies and strategies in place. Even more important, Malta has to improve its productivity. Increasing labour participation helps to grow the economy but is not sufficient. It is only through increased productivity that our enterprises can afford to pay higher salaries. This requires more effective investment in people, closer collaboration between the government and enterprises as well as between enterprises themselves.
Increasing productivity goes beyond cutting costs; it is about innovation and working smarter to be able to command higher prices. The government also needs to take into account the changes taking place in our labour market.
Given that we want our children to stay longer at school, this will inevitably delay their entry into the labour force. Others may decide to further their studies to enhance their career later in life. This calls for greater flexibility in the way NI contributions are computed.
Ultimately, higher productivity is the long-term answer to adequate, sustainable pensions. In the short term, we have to rely on a clear sense of priorities and fiscal discipline.