Several years on after the amendments to the first pillar of the pension system in Malta, that which is provided against social security contributions, a fresh discussion is emerging about pensions. It relates to the second pillar, but is not restricted to it. The government has sought the advice of the World Bank about the next step but there should be no doubt that it will need to listen to advice that emerges from a fresh consultation process in Malta.
Various quarters have already come forward with their first opinions. It is it interesting how two of them converge, although coming from different sides of the fence.
On June 23 this newspaper reported the current views of the Malta Employers’ Association. The association urged the government to conduct proper consultations before considering the introduction of mandatory second pillar pensions. It said that second pillar pensions would result in additional costs to employers at a critical time when many companies were struggling to recover from the brunt of the recession and the hike in wages and utility tariffs.
One also needed to determine the impact of mandatory contributions on employees’ purchasing power and the effect on aggregate demand of forced savings, said the MEA. It pointed out that many countries also have problems with the portability of such pensions between jobs and also in job mobility between countries. The administrative burden of second pillar pensions is particularly problematic to SMEs.
The association added that a country’s culture should also be factored in when considering pension reform. “In Malta, there is a high level of home ownership and many prefer to invest in a second property rather than in financial schemes. It would be mistaken to assume that, in the absence of second pillar pensions, the average Maltese person is not providing for his future standard of living,” the MEA concluded.
A parallel view was expressed three weeks later on behalf of the Alliance of Pensioners’ Organisations in the context of an EU Green Paper on pensions and the quoted opinions of two local economists. One had recommended the immediate introduction of a mandatory second pillar system, while the other advised its introduction only when our economy is in better shape.
The alliance came out strongly in favour of strengthening our basic pension system (and, it said, removing its present in-built discriminations) but was very much against a mandatory second pillar. It pointed out that in the past there used to be pension arrangements similar to the second pillar – occupational or service pension schemes. They still exist elsewhere, e.g. in the UK. None of these second pillar/occupational pensions is mandatory, according to the association: they could be terminated at any time, if economic factors no longer permit them.
A spokesman for the alliance explained it was against a mandatory second pillar system because it would impose a great financial burden on individuals and public funds and threaten the viability of private companies in this highly competitive world economy.
The recommendations on how the alliance sees the Maltese basic pension improved, and having its present inbuilt discriminations removed, are being communicated to the pensions review working group.
Dissimilar views abound. Many people are against the first pillar measure, being gradually implemented, whereby the retirement age would be raised to 65. In contrast there are those who hold that judges, who already retire at 65, should be allowed to work longer in view of the experience they would have accumulated by that age. Yet again, in contrast to that there are judges, among them Joe Galea Debono who retired recently, who would not be interested, much less would they seek, to work beyond their 65th year.
The government had its work cut out to come up with the reform of the first pillar, in an effort to make the social security pension sustainable given that it is threatened, as in other countries, by an ageing population. Through this phenomenon whereas at present four workers pay for every pensioner receiving a state pension under the social security system, in a few decades the ratio will drop to two-to-one.
That is why the general retiring age is being gradually raised to 65 and the qualifying period of social security contributions is being upped from 30 to 40 years. The pension itself is also being enhanced. But there is doubt whether that would be enough to provide a decent standard of living to retirees.
That leads to the discussion on second and third pillar arrangements, with varying degrees of agreement and disagreement. The more individuals and representative bodies make their views known, the better. It is all right for working groups to be set up under the aegis of the EU and for our government to seek international advice. Such advice will draw upon what is taking place in other countries also faced with the phenomenon of an ageing population.
Nevertheless, it is the internal social and economic set-up, that will count most to ensure a reasonable measure of general agreement without which no system will have a real chance of success.