I often wonder why the local media often fail to discuss certain important reports that give a long-term perspective of the economic and social issues that we will face in the next decade and beyond. One such report is that by Standard & Poor’s who have just issued an important document entitled Global Aging 2010: An Irreversible Truth.
This credit agency’s main aim when compiling this report was to try and determine how most countries’ credit ratings are likely to be affected, if they do not promote reforms to deal with their escalating costs relating to “old-age pensions, healthcare and long-term care for the frail and unemployment benefits”. It ignores costs relating to child benefits and education, even if these are another factor that is causing serious stress on public finances in most countries.
The main conclusion of this report is that, if nothing is done in the next decade, most countries will be facing total bankruptcy and a collapse of their welfare system. The indicators of this looming crisis for the advanced economies in the S&P sample, that includes Malta, are: a doubling of the dependency ratio ( the number of people over 65 relative to the population aged 15-64); a massive increase in public debt relative to GDP that is expected to increase from the current 64.5 per cent to reach 329 per cent by 2050; the structural imbalance in the government deficit escalating from the current 5.7 per cent to 24.5 per cent in 2050; and the cost of providing for age-related benefits escalating from the current 16.7 per cent of GDP to 27 per cent in 2050.
Malta’s position, while certainly not the worst in the sample, is not encouraging. According to S&P our dependency ration in 2050 will increase by about 130 per cent - one of the biggest increases in the large sample examined. By 2050, our debt, when compared to GDP will rise to 315 per cent, while our structural deficit will go up to 24.5 per cent. Our average GDP growth in the next three decades is projected by S&P at 1.7 per cent - a big drop from the 2.4 per cent estimated in the previous S&P report of 2006.
Do we need to worry about these issues, seeing that they are projections that stretch over three decades and therefore could be unreliable? If one subscribes to the school of thought that “when ignorance is bliss, it is folly to be wise”, then, yes, we can continue to be complacent and let the next generation, and the one after it, sort out the mess we will leave them. We may have become so good at managing by crisis, but this is hardly a legacy that we should be proud of.
In the next few weeks we should be seeing the update of the 2005 report on pensions by the Pensions Working Group. I expect the document to highlight the problems, but it is likely to be quite light on tough recommendations. There will, no doubt, be some soft targets like encouraging the culture of saving, urging the financial services industry to provide equity release options for those owning property to finance their retirement, creating fiscal incentives for people to save and pass legislation to encourage voluntary pensions schemes.
But after the experience of the last budget, I do not expect good intentions to be underpinned by robust measures to hit clearly identifiable and ambitious targets in a defined time span. The second pillar will now probably kick off in a voluntary way without any indication of when it will become mandatory. Clear commitments to let anyone who wants to continue working beyond current retirement age to do so by right, rather than as a concession, will be conspicuous by their absence.
Finally, I do not expect any concrete recommendations on how or when the financing of healthcare, pensions and unemployment benefits will be reformed to make them sustainable.
As predicted by The Economist, governments caught up in this situation will have an option of either defaulting on their debts, or defaulting on the promises they make to the electorate by continuing to increase the retirement age. I add to this: they will probably also ration the health services and other benefits as is already happening in certain cases.
The writing is on the wall for all to read. But the current narrow focus on the annual fiscal deficit and the media frenzy that characterises the annual budget season is making the reading of this writing that much harder to decipher.
jcassarwhite@yahoo.com