Given the state of politics in Malta, there is only one issue that could possibly derail Prime Minister Joseph Muscat from sweeping back into office in four years’ time. This is the economy.

While Malta’s economy has come through the eurozone crisis of the last six years relatively unscathed and is buoyed up by high tourism numbers and high consumer spending, it could still find itself facing difficulties from the outbreak of another eurozone crisis.

The European Central Bank has recently acted to take the eurozone into unchartered waters by sending the interest rate on bank deposits into negative territory (banks will effectively be charged to deposit their money) in an attempt to force them to lend to the real economy as part of a package of extraordinary measures to ward off deflation in the currency union, to generate demand and to lift growth.

If these steps fail and another eurozone recession is triggered, it will set off a downward price spiral (deflation) that will make member states’ overbearing national debts unaffordable. If this happens, most economists are agreed this will make the last eurozone crisis feel like a gentle trial run. Malta’s open economy is unlikely to escape unscathed from these shocks to its major trading partners.

This is why the European Commission’s recommendations on Malta’s 2014 national reform programme and its opinion on the 2014 stability programme cannot just be dismissed – as the Prime Minister has tended to do – as simply well-meant advice that Malta may or may not decide to accept. Yes, it is advisory, but in asking Malta to address its structural deficit in a more sustainable manner, the Commission is also ringing alarm bells which it would be foolish for it to ignore on grounds of short-term political expediency.

For the second year running, the European Commission has warned Malta about the long-term unsustainability of its pensions and healthcare systems. It has urged Malta to speed up reforms to secure the long-term viability of pensions and its very good, but financially draining, health service. The Commission has told Malta to take early action if it is to weather the financial storms ahead to achieve a balanced budget in the medium and long term as it is obliged to do under the EU Fiscal Compact.

The government has already grasped the importance of making the costly health service more efficient. But among the five recommendations which the Commission has put forward is one that has particularly caught the eye since both the government and the Nationalist Opposition (at least when they were in government) have come out against it.

This is the need to take action, without further delay, to ensure the long-term sustainability of the pension system “by significantly accelerating the planned increase in the statutory retirement age and by consciously linking it to changes in life expectancy”. It also advocates measures to encourage private pensions savings – the so-called third pillar pensions – an issue on which the government may soon be announcing proposals.

The unsustainability of the current pension arrangements has been well known for some 20 years. The average age of the Maltese population has been rising steadily due to a falling birth rate, a decline in those aged 50 years and under and increases in those aged 50 to 64, 65 to 79 and 80 years and above. Within the next few years, 18 per cent of the population will be over 65 and this will increase to almost 25 per cent by 2025.

What this means in practice is that a smaller productive workforce will have to provide for the pensions of an increasingly larger non-productive, retired section of the population. Advances in social conditions and healthcare will increase life expectancy and will, therefore, add to the number of years when a pension will be payable.

Both parties should face up to the reality of the pensions time bomb honestly and in a bipartisan manner

A report in 2009 by Malta’s only independent think-tank, The Today Public Policy Institute, entitled ‘The sustainability of Malta’s social security system: a glimpse at Malta’s welfare state and suggestions for a radical change of policy’, concluded that, within the space of a few years, expenditure on the two-thirds pension would be equi-valent to about 80 per cent of the funds generated by social security contributions. This upward trend, caused essentially by the incontrovertible demographic challenges of an ageing population, could make Malta’s pension system both unaffordable and economically unsustainable.

Instead of playing politics with the issue, politicians of both parties should face up to the reality of the pensions time bomb honestly and in a bipartisan manner. This is a national problem requiring a unified national approach.

For a start, the introduction of a mandatory second pillar (that is, a supplementary or occupational pension scheme) to the State’s two-thirds pension should be implemented without further ado. But beyond this, action to delay the age at which pensions become payable also needs to be taken sooner rather than later as a government-appointed pensions working group warned a few years back.

The default position which the Prime Minister has adopted that, rather than raising the retirement age as the EU requested, the government should focus on economic growth to solve the problem is simply wrong-headed, dishonest and misleading.

The economic maths don’t add up. While, of course, Malta should strive for economic growth to pay for its generous welfare state, this will not, on its own, suffice to cover the demographic gap.

The example set in France, where President François Hollande, when he was elected, partially reversed the modest increase in retirement age from 60 to 62 introduced by Nicolas Sarkozy – and which, presumably, may have inspired Muscat’s position - is the wrong modelto emulate.

In France, it has inevitably led to swingeing increases in French tax rates to balance the fiscal books with the dismal political and economic results for France, which we are witnessing. This is not an option available to Malta, which already carries a relatively high tax burden and whose future competitiveness is vital to its economic survival.

The imperative now should be to make pensions more affordable for the country by dealing with the structural weakness that lies at the heart of the present system and progressively to raise the age at which one becomes eligible for it.

In manoeuvring for narrow political advantage, the Prime Minister is simply misleading the people about the difficulties ahead, as well as storing up trouble for the future. There are no easy solutions and it is deceitful to pretend otherwise.

The EU’s message is clear. Malta’s future fiscal sustainability can only be achieved through expenditure restraint, a raising of attainment levels in basic skills, governance improvements and a reordering of spending priorities. The projected reduction in Malta’s working-age population will reduce growth and tax revenues at the same time as the fiscal burden of a larger population of elderly people is increasing.

The corrections needed to bridge the forecast gaps caused by the pensions time bomb imply a vital need for a critical reassessment of how they are funded and the age at which they are provided. The government – supported, one would hope, by a chastened Nationalist Opposition, which had also ducked the issue when it was in office – must urgently face up to this responsibility.

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