The recent review for social security pensions lays down a number of proposals aimed at (a) social needs and issues related to society and work (b) the sustainability of the pension system (c) encouraging saving up for private pensions and (d) the problems faced by those who are already pensioners.
The pension review rules out an increase in the statutory retirement age beyond the present 65, and also rules out increasing social security contributions, presently set at 10 per cent for both employee and employer. Second-pillar pensions – paid by employers and employees –are not recommended either.
The foremost objective of this review was to provide evidence that the pay-as-you-go pension scheme can be sustainable in the long run. Evidence of financial sustainability with the existing system would demonstrate that the European Commission’s insistence to raise the retirement age to reflect changes in life expectancy is not required.
The evidence is largely dependent on the assumptions used in the model used to project expenditures. Assumptions such as GDP growth, labour productivity and population projections are critical in terms of the reliability of projections.
The strategy group relied on Europop 2013 for population projections, which are significantly different from previous ones when population growth was expected to slow down. The more recent projections show Malta’s population will continue to rise, increasing the working age population and therefore easing, somewhat, the dependency burden – with it becoming critical around 2040 and beyond.
This is significant in that it demonstrates that Malta’s population profile is also changing because of net migration, projected around 1,400 annually in the model. Given the growing uncertainty in North Africa and elsewhere in the African continent, as well as the free movement of persons from the EU, it is perhaps not unreasonable to assume that net migration could reach the 1,400 mark in the future. Further increases in the working age population could, in theory at least, also help mitigate the demographic ageing process.
The strategy group believes that State pensions will remain an important source of income for future retirees, but given that financial sustainability was a key objective, they recommend that it should not be the only one. There can be no doubt that with pension benefits remaining virtually at existing levels, future retirees will increasingly need to resort to private pension schemes to receive an adequate retirement income during their non-working years.
The recommendation by the strategy group for a behavioural change to increase the take-up of voluntary pensions is nothing extraordinary and clearly is not an option for most future retirees. With changing lifestyles and a disposition to consume and save less, this option can only be viable for a small proportion of the population. Incentives such as tax credits are necessary to influence people’s behaviour but this will benefit higher income earners – leaving lower income earners reliant solely on State pensions.
Given that second-pillar pensions are being ruled out, a policy which provides tax incentives for high income earners to supplement their retirement income while low income earners (who cannot afford voluntary pensions) will rely solely on State pensions means an increasing number of elderly people would be at risk of relative poverty.
The proposal to extend the guaranteed national minimum pension to older people – by addressing the most vulnerable pensioners first – is a step in the right direction with persons who would be 76 or older on January 1, 2016, starting to receive the guaranteed national minimum pension next year and with more elderly people becoming eligible gradually by 2027.
The proposal to encourage people to work beyond retirement age is also commendable. Those entitled to retire between the age of 61 and 65 could improve their pension by up to 12 per cent if they continue to work and forego their pension while they do so. Pensions could be improved even further if people keep working without receiving a pension beyond the age of 65.
Equally the proposal to give credit to those who stop working to take care of their children or for further studies is fully compatible with active labour market policies.
As in any review, the success or otherwise of proposals will be demonstrated during the implementation phase (assuming these are all taken on board by government).
Equally important is whether the projections are robust enough to convince the Commission to withdraw its recommendation to increase retirement age to reflect life expectancy.
Philip von Brockdorff is the head of the Economics Department at the University of Malta.