The Finance Minister has dismissed the urgency of "painful reforms" requested by Brussels, which included Malta in a list of EU member states with unsustainable long-term finances because of an ageing population.
"These comments have appeared regularly in every report on Malta. They come as no surprise and it is not a matter of taking corrective measures in the next Budget," Tonio Fenech said yesterday, insisting the government had undertaken pension reform three years ago by increasing the retirement age to 65.
Economist Joe Vella Bonnici was less dismissive of the EU's warning in the light of the Greek crisis, which sent shockwaves in the eurozone.
"Up to six months ago, in the pre-Greece period, the Commission's warnings were just a question of procedure because they believed the government was in control of the fiscal deficit," he said. This reality changed after the multi-billion euro Greek bailout by other eurozone countries, he insisted.
"In the post-Greece period, the implication of what the Commission said is more serious. Although it acknowledges improvement, there have been regular setbacks in government deficit and debt, which may lead to questions on whether the government does really have control of its finances," Mr Vella Bonnici said.
When Malta was put in the same basket as Spain, Ireland and Greece, he added, it was not good for perception. "Today, more than ever before, it has negative implications in investors' eyes," he said.
Since 2005, the post-war baby-boom generation started reaching pensionable age, leading to exponential growth in the pension bill at a time when the number of entrants into the labour market was dropping because of lower birth rates along the years.
The cost of retirement pensions last year increased by €25.5 million over 2008 and, according to National Statistics Office figures, they made up 5.6 per cent of GDP, up from the 4.8 per cent two years earlier.
An analysis of the social security system last year by a study group headed by economist Joseph F.X. Zahra for the Today Public Policy Institute, found that, in 2015, the expenditure on the two-thirds pension alone would be equivalent to 43 per cent of all social security expenditure. In 2009, the outlay on the two-thirds pension accounted for 33 per cent of social security expenditure.
The study group painted a critical scenario of the social security system forecasting a shortfall of almost €192 million in the financing needed to prop up Malta's welfare system as a whole.
These figures are the ones worrying the Commission and, according to Mr Vella Bonnici, increasing the retirement age was "evidently" not enough.
When the Commission spoke of "painful reforms", he said, it was suggesting Malta implement the second and third pillars of pension reform, which were in the government's original blueprint but were never put into force.
The second and third pillar provided for individual and employer contributions into privately-run pension schemes, one of which would be compulsory and the other a voluntary top-up. Only the first pillar of the reform - government-funded pensions and retirement age - was implemented.
"The second and third pillar reforms would make pensioners less dependent on the government for their income but they are politically sensitive," Mr Vella Bonnici acknowledged.
The reforms the Commission is seeking are unlikely to happen in the near future but Mr Fenech pointed out that, when enacting the first part of pension reform, the government had also made a commitment to review pension changes every five years.
"The expenditure on pensions is something that will remain there forever and requires ongoing analysis," Mr Fenech said, insisting the matter was under control.
ksansone@timesofmalta.com