A couple of weeks ago Finance Minister John Dalli spoke about the need to effect the reforms required to make our pensions system and our welfare system sustainable, given the economic wealth that we generate, the demographic profile of the Maltese population, the other economic and social reforms required in the country and the state of public sector finances.
There was the usual cry that there was no consultation made before such a statement was made and that acquired rights should not be touched. The reaction to the minister's statement was at times hysterical to the point of being farcical, given that study after study have been commissioned about the sustainability of our pensions system and our welfare system.
We have also had a number of international institutions commenting about these two issues. Therefore, claiming that one did not know about the problem is irresponsible; and claiming that there has not been consultation about these reforms is equally irresponsible.
If anything, we have probably got into the cycle of analysis paralysis on these two issues. The basis of these two systems was set at the end of the 1970s and essentially what we have had since then have been refinements. They were seen to be sustainable then and were also judged to be in line with economic and social developments then.
Therefore, that we may wish to effect reforms to systems that were designed 20 to 25 years ago should really be of no surprise to anyone; if anything we should welcome the opportunity to do so.
One may claim that these two issues should be kept separate because they impact differently on different people. There is validity in this argument. In fact, Mr Dalli, in a budget speech some years ago, did hint at the idea that the contribution that persons in employment pay for social security should be split 50-50 between expenditure on social benefits and expenditure on health.
There are some basic facts to look at. The government contributes Lm18,060 million as an employer, Lm66,300 as a grant equivalent to one-half of the contributions of employees, employers and self-employed, and Lm47,964 million as a grant to make up for the shortfall of income against expenditure.
Total expenditure on social security is Lm246,964 million, made up of Lm157,754 million on social benefits, Lm86,567 million on hospitalisation and community care and elderly and special needs, and Lm2,643 million as administration expenses.
Moreover, the government spends another Lm37,100 on non-contributory benefits, which are funded from the general budget. We also spend another Lm6 million on various programmes and initiatives all aimed at those less advantaged. This is the whole entity of the challenge in hand.
There are those that have claimed that the answer to the pensions issue is private pensions. A number of individuals did go down that route.
However, that route works only when one has a buoyant international economy and pension funds can make capital gains from the increase in value of shares, bonds, collective investment schemes, property and other investment instruments. The experience of the last two years has shown that some private pension funds cannot sustain themselves given the fall in the value of investments because of the weak international economy.
Some have even suggested that a public pension fund is created and this would be managed jointly by the social partners. The point is that our system cannot even pay for itself on a year-to-year basis, how can such a fund be created?
However, there is an underlying principle in the suggestion to move towards private pensions. This is that a person has to pay more in order to provide for his or her pension. And I believe this is the crux of the matter.
Additional funding is required to make both our pensions system and our welfare system sustainable in the long run. In this regard, I believe that our present system of funding is socially unjust and rendering it more socially just would provide some additional funding even if not enough.
The fact that we pay 10 per cent of the income generated from our main employment as social security contribution makes the system similar to a proportional system of taxation. The fact that there is a cap on the contribution once a certain income is reached makes the system a regressive one on reaching this threshold.
The reason for this cap is that there is a corresponding cap on the amount of pension paid out by the government. However, we should not tie together the revenue collection side and the distributive side of social security.
I believe that there should not be a cap on the social security contribution that is paid and should always be 10 per cent of the income from our main employment.
One may also argue that for the sake of social justice, the system should be to pick up 10 per cent from all employment income, if not actually make it a progressive rate such that one pays an increasing proportion of one's income as his or her income rises. We do the same thing with our income tax; why cannot we do it with social security contributions?
On the distributive side, the two-thirds concept should remain because that would benefit those that have contributed more and the cap on the amount payable should remain because that is a function of what can be afforded by the state.
We have a similar situation with children's allowance. Anyone earning more than a certain amount receives no children's allowance.
This would mean that a number of persons would still opt for private pensions or other sources of income to top up their state pension. However, this would in effect be a savings plan that any person has a right to do.
I also believe that retirement age should be raised. However, this cannot be a blanket policy. Some categories of employees cannot continue working beyond age 61 because of the nature of the work that they have done for most of their working life.
The system has to take account of these employees and the rest of society should accept this requirement. Reining the retirement age would also bring about additional funding to the system.
With regard to other social benefits and our health scheme, there seems to be some sort of agreement to reform the way these are provided. Law enforcement has to be strengthened to eliminate abuse and present systems have to be made more efficient.
Such inefficiencies raise concern as to whether the provision of institutional health care will remain sustainable with the opening of the Mater Dei Hospital or whether the state can continue with programmes aimed at persons with special needs or persons facing social problems. We probably need to introduce some system of payment for certain health services that would be based on some form of means test. The increased efficiency in tax collection would today make such means, tests more meaningful.
In the long run, the welfare provision and pension provision is everyone's problem. It is a problem now, not in 20 years' time as some may seem to think. A society that does not provide an economic safety net to those that need it, is bound to have social tensions built in it.
An economy cannot thrive if there are such social tensions. This is where social and economic issues become closely intertwined and we have to take account of this phenomenon.