Malta facing ‘most severe’ ageing costs

Malta could face the most severe fiscal shock in the long-term unless the cost of ageing is addressed, according to a report by credit rating agency Fitch.

Without reforms, population ageing will cause potential economic growth to decline over the long-term, worsening the fiscal challenge, the agency warned.

Malta is cited along with Luxembourg, Belgium and Slovenia as the countries which face the most severe impact on ageing.

In its report Ageing Costs: The Second Fiscal Crisis, Fitch concludes that, without major pension reforms, it could possibly take negative rating actions over the next decade on the countries facing the most pressing ageing pressures.

It says Japan, Ireland and Cyprus face the largest jump in ageing costs over the next decade.

“While a successful resolution of the current fiscal crisis remains the most important driver for many advanced-economy ratings, without further reform to address the impact of long-term ageing these economies face a second, longer-term fiscal shock,” it said.

According to Fitch, without reforms to boost labour productivity and participation rates, GDP growth is expected to decline in these countries.

It said that without the implementation of mitigating reforms, the median country is projected to see its budget worsen by 0.6 per cent of GDP by 2020 and 4.9 per cent of GDP by 2050.

Consequently, many of these countries would experience escalating government debt-to-GDP ratios, with the average EU27 debt-to-GDP projected by Fitch to rise by 6.9 per cent by 2020 and 119.4 per cent by 2050.

Its report concludes that few countries faced an imminent problem. Despite the fiscal challenge currently facing some periphery eurozone countries, their recent experience also shows the power of reforms in transforming long-term projections.

Recent reforms in Portugal, Italy and Greece have effectively neutralised the long-term impact of ageing on public finances in those countries.

The issue of the ageing population and pensions has been on Malta’s agenda for several years and was back on the electoral agenda recently when Labour leader Joseph Muscat promised not to raise the retirement age above the present 65 years.

Economists John Cassar White and Karm Farrugia agree with this stance, saying there were other measures which could be taken to ensure the sustainability of the pension system.

Mr Cassar White believes that raising the retirement age was just one element which could address the pension system but the problem could be mitigated by an increase in female participation rate to ensure more people are paying national insurance contributions.

“With more people contributing, there is less pressure on increasing the retirement age,” he said.

He suggested granting fiscal incentives not only to women, especially in the over-45 age bracket, but also to employers by reducing the NI element to five or seven per cent of the salary rather than 10 per cent.

Mr Farrugia agrees with not increasing the pensionable age over the next legislature because the economy could not withstand another shock following the recent four-year increase.

However, he said the next government should study whether the age should increase following this five-year period.

Mr Cassar White said a future government should legislate to give those who reach pension age the right to continue working rather than depend on the green light of their employer to do so.

While agreeing with this concept, Mr Farrugia warns that the other side of the coin must not be forgotten.

“I would like to hear the employers’ side of it. It is something that should be studied in further detail because I think we should allow employers the leeway to pass judgement on whether these workers are fit to continue in employment,” he said.