28 Feb. - 6 March 2001

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The exploding welfare gap – the writing on the wall

With the ever-widening welfare gap and the government's intention to privatise the pension system, private pension products are expected to be the next area of future growth in the financial sector. By the end of 2002, it will be necessary for the government to be in a position to open the doors to providers of pension funds in order for them to begin launching their products on the Maltese market. With the welfare gap currently exploding, the UHM's Gejtu Vella and Lawrence Gonzi, Social Policy Minister, both recently addressed the Federation of Industry's annual conference – speaking on the subject: The Welfare Gap – Action Now. Following are their respective views.

.  Gejtu Vella – UHM Secretary General

I shall give you some figures to digest and help you form your own opinion. During 1999, Lm67 million were spent on hospitalisation, community care, care for the elderly and administration expenses. Retirement contributory pensions totalled Lm66 million. Children allowances accounted for Lm19 million. Government expenditure in this respect continued to show an upward trend in the year 2000. I will not tax you with more figures as I am sure that these figures should give you a very good glimpse of what we are talking about.

During the year under review, the welfare gap stood at the staggering figure of Lm59 million. In addition to this another Lm34 million for the non contributory items such as family bonus and old age pension should be taken into account.

What is the welfare gap? In simple words it is the difference between the revenue generated from N.I. contributions and the expenditure for paying out pensions, sickness benefits, etc. We all, that is the Government, the employers and the employees way back in 1956 decided to pool our financial resources to provide for pensions and other ancillary provisions. But what is collected annually is not making up for the sterling service we are provided with. Time for reckoning. So we are spending more than we can afford, some may say. As a matter of fact yes, but this was and still is a decision which we all decided to shoulder together. As a matter of fact some may have had more influence than others. Anyhow this problem will not be washed away by pointing fingers.

Our society opted to provide, and rightly so, the best possible safety net either in cash or in kind to all citizens as may be required. This was done irrespective of their income. This was elected to by choice. I need not stress this point as I am sure that all of you here recognise that nothing comes for free. We all pay for the services provided. Government collects contributions, be they social security contributions or taxes, and re-distributes either once again in cash or in kind, as may be the case.

So, going back to the roots of the problem, presently we have a system which is not self financing. Notwithstanding this, we, that is Tom Dick and Harry elected to finance and support the welfare gap through the provisions of our collected taxes. As a matter of fact the Government supplements the social security fund by millions from our taxes to break even at the end of each year.

Let's look at some facts. We are facing an ageing population. We have a shrinking family size. We have created and rightly so a welfare state which is of unique stature. So much so that the pension for minimum wage earners is higher than the stipulated two thirds. We have also rampant abuse in tax evasion and social security benefits.

In this respect, statistics clearly show that the self-employed sector declares an annual income which could be real in some cases but nobody could possibly believe that a self-employed person earns and lives on an income which is far less than the national minimum wage presently Lm49.88. At this stage I shall only say that we still have to be convinced otherwise by our business community. But we find it very strange that almost 81 per cent of our business community declare an income of not more than Lm3,000 a year. A more persuasive approach in this regard would be appreciated by all.

Our welfare system is set up to assist and help protect the vulnerable amongst other things. Our system provides both for assistance in the form of benefits in kind and benefits in cash. Our national social security schemes vary considerably from hospitalisation to all kinds of pensions. From children allowance to injury benefits. From marriage grant to open heart surgery. No pun intended.

In this array of statements one must also take into account that there are services which are of a contributory nature and other services and financial benefits which are non-contributory.

Economic insecurity is a fear which touches many people. During the past years workers, the state and entrepreneurs have, in a variety of ways, made provision for those least able to look after themselves. The scope of such provision has been extended and formalised, resulting in a number of different social security benefits.

In spite of the growing complexity in the way we are living today, the basic features of social security benefits still relate to economic security for employees, pensioners and their families. For the employer, faced with increasing expenditure for this provision, the evolution of social security and the increasing complexity of legislation in the field of employee benefit plans are subjects which must be constantly reviewed.

Changes in these fields have been rapid in recent years, reflecting perhaps the political pressure of under privileged groups and a developing social conscience amongst all. As a result, attention to detail becomes essential if beneficiaries' satisfaction is to be maintained and employers' expenditure be kept to a minimum.

As such, building a system that is less prone to crisis and abuse and better able to address crises when they occur, is one of the best things we can do. Secondly we must ensure that the benefits of economic growth are shared more equitably and broadly. We simply cannot go on doing the same things we did in the past and expect different results.

Clearly, there is an urgent need to build a new social contract to ensure growth and shared prosperity in the new economy. Appropriate and comprehensive policies are required to support the economic flexibility that entrepreneurs need to be competitive while also minimising workers and pensioners insecurity and ensuring that economic risks and rewards are shared more equitably.

For the past fifteen years this issue was on the agenda of all social partners. However, this issue may have been on the agenda of different social partners at different times. It was only recently that this issue became a common issue for all social partners. By all means it is an issue which needs evaluation, a course of action, and a broad based consensus. Arresting the welfare gap and taking the remedial actions is no small task.

I shall first of all make some general comments. Social security contributions are a cost to the workers and employers. Contributions reduce the take home pay of employees, while they raise the wage bill for employers. For employers, the cost per worker is the wage plus the social security contribution; while for employees his wage is less the social security payment. The cost of social security is substantial and is met by contributions from the insured persons, employers and government through general taxation.

The projected demographic shift over the next twenty years may give an indication which certainly needs to be looked at. Whereas in 1992, 22.7 per cent were children up to fourteen years of age, it is expected that by the year 2035 we will experience a downward shift to 18.6 per cent.

On the other hand, those over 60 years of age will increase from 15.3 per cent in 1992 to 23.5 percent by 2035, an increase of 8.2 percent. During this period, the number of persons aged 60 and over is projected to rise by around 40,000 to just under 103,000, nearly a quarter of our population. These demographic developments have obvious implications. An ageing population, seeing the portion of the sixty plus rising from 15 percent to almost 24 percent within three decades, compounds the issue. Whereas there were four workers to every pensioner in 1996, this will decline to 2.3 workers to every person over 61 by 2025.

From the UHM perspective, all retired persons should continue to receive an adequate income to enable them to live with dignity at all times and to share in the benefits of economic growth.

A change in principle may be adopted for social security purposes. An incentive which may be in cash or in kind to both the employer and employees who opt to participate voluntarily in a private pension scheme may result in an opportunity for a better standard of living on reaching retirement age. Thus while pensioners will be in a better financial position the national economy will grow.

Government must ensure that social benefits are directed to those who really deserve them because of their needs. The UHM for one, openly supports efforts directed to curb abuse. Only recently it was made public that fifteen thousand beneficiaries have been found to have under declared their real income in order to benefit from allowances which they were not entitled to. The island's financial resources are so limited, that it is essential that what is available for social welfare is justly distributed according to needs.

This problem is both serious and complex. A combination of approaches must be used to reduce the risks associated with the ever increasing strain on the welfare system.

Evidently the debate on the welfare gap will intensify. The focal point of the debate will be the reaching of a broad consensus on the long term solutions. For the UHM the welfare gap is regarded as a necessary evil. We will continue to strive with the other two social partners to look for possible solutions. The responsibility in this regard should be shouldered by all at all times for the benefit of the future generations. This is of utmost importance.

The aim of the revised social security scheme should be regarded as, to as much as is reasonably possible, maintain the same level of the living standard achieved during the course of the citizen working life.

The UHM will continue with its endeavours to ensure that workers, pensioners and their families will be provided with at least a decent safety net at all times. While encouraging a re-designed model of social benefits and welfare to all citizens based and assessed on means which are in nature true and responsible, the UHM will continue to shape the dialogue which is taking place on this issue.

To conclude, I must also emphasise and make it amply clear that those who are most in need are placed at the very top of the priority list. Making financial ends meet in essence is of the utmost importance. Meaningful social justice at times may be painful. Our society should continue to look after those in need and provide for a sterling welfare. This could only be achieved if everyone, irrespective of how big or small, appreciates that no one owes us anything. If we really believe in a welfare state we have to brainstorm our minds and make it happen the right way.

.  Lawrence Gonzi – Social Policy Minister

In two months time, we will hit the half way mark of my government's five-year term. We are therefore at a point in time where we can and should take stock of what has been achieved so far and where we stand with respect to the ongoing challenges that face our country.

Complacency is, however, out of place. Whilst retaining and indeed strengthening further the present rhythm of economic development, we still face some important challenges that cannot and should not be underestimated. At the risk of oversimplifying a highly complex equation, I will state that, in my opinion, the two most important tasks which we have at hand are: firstly the need to regenerate our human resources, empowering them to be able to respond to modern realities; secondly the need to revisit our welfare systems in a manner which guarantees two important and fundamental criteria, namely their effectiveness and their sustainability.

These two tasks might, at first sight, appear to be totally unrelated. Allow me, however, to state at the very outset that the two challenges are intimately related to each other. They are both important ingredients of any solution we might wish to adopt in seeking to resolve the welfare gap issue.

I propose to outline to you three points. The first relates to the need to understand the extent of the issue that we face. The second relates to the fundamental principles which cannot and should not be divorced from the strategy that is required to lead us to a resolution of the task at hand. Finally, my conclusion will briefly outline to you the measures that have been taken by my government over the past two years and which are specifically targeted to reduce this gap in as smooth a manner as possible.

My first point focuses on the need to understand the extent of the issue that we face. According to the financial estimates approved by parliament for the current financial year (ie 2001), our social security account envisages an expenditure of Lm233 million as against projected revenue of Lm182 million. This leaves us with a welfare gap of Lm51 Million.

Again, according to the Economic Survey published in November of last year and covering the period January to September 2000, the Department for Social Security together with the payments of Social Security Benefits accounted for 41.2 per cent of total recurrent expenditure. This by far represents the single largest share in Government expenditure. The Survey explains that during the period under review, expenditure by the Department of Social Security increased by Lm4.3 million which was primarily the result of increases in state contributions in terms of the Social Security Act. Similarly, Government welfare payments increased by Lm3.6 million which was largely attributable to an increase in the number of social security beneficiaries and higher average compensation levels.

The figures that I have just quoted represent the traditional way of describing or evaluating in money terms the gap between revenue and expenditure on the welfare account. We all know, however, that the total government outlay on welfare in Malta is a lot more than that.

A more realistic balance sheet of our national welfare account needs to factor in social provisions in respect of social housing, state education, measures to combat unemployment and activate dormant human resources as well as a quantification of general social welfare services to assist persons who have encountered difficulties along their life path.

There is another aspect which needs to be emphasised if we are to have an open and clear debate on how to address the welfare gap issue. Very often, the debate on this topic tends to revolve around the pensions issue. Admittedly, this is a central and crucial theme — I could add that this is so in all countries around the world. It is, however, a topic which is not exclusively linked to the welfare gap challenge. Indeed, retirement pensions in Malta account for 33 per cent of the general welfare expenditure in our Social Security account.

This is certainly a major chunk, but the dimensions of that challenge are dictated by other factors such as the projected ageing of our population in line with changing social values and the resultant drop in birth rates together with the impressive quality leap in medical services which are prolonging life expectancy levels.

The point I am making can therefore be summarised as follows: When discussing the welfare gap challenge we need to encompass all the gamut of services independently of whether they are balanced by some form of contributory payment made by taxpayers and/or by beneficiaries. Otherwise, we may risk underestimating the real extent of the task we have in hand.

The second point I would like to present to you relates to the fundamental principles which should underlie our strategy when addressing this issue.

Social Welfare benefits are, by their very nature, measures to mitigate inequalities, to maintain social cohesion through solidarity between different socio-economic strata. They are social allocations based on a contract defining the relationship between individual and collective responsibility. Such allocations are more often than not targeted on the basis of need, directed at those in the most dire circumstances.

There is, therefore, a human and social responsibility to support such affirmative action. Social welfare should be considered above all as a set of mechanisms ensuring collective solidarity and based on redistribution of incomes.

More importantly, we should be very clear in our minds that welfare support systems, if properly designed and implemented, should translate into crucial factors that sustain economic advancement. Of course we must justify all our social expenditure, but the measuring tool which we should use in order to assess whether an expenditure is justified or not, cannot be limited to an book keeping exercise of inputs versus outputs, credits vs. debits.

Because the bottom line is not financial — it is human. Our measuring tools should therefore focus on the financial aspects but within a human dimension.

My point here is simple. Anybody who suggests that we can resolve the welfare gap by simply reducing our social expenditure, needs to understand that this type of strategy is short sighted and will inevitably have an economic boomerang effect. If, on the other hand, we are able to devise a strategy which encourages people to develop their full potential, which makes full use of our human resources, which relieves social stress in order to release economic potential — then we would be on the right track.

Social cohesion is therefore our underlying principle.

This train of thought brings me to the third and final part of my address to you this morning. In line with the underlying principle of social cohesion, my government has embarked on a long list of initiatives which, in my opinion, target the very core of the welfare gap issue.

This list includes measures which are intended to curb abuse, introduce higher efficiency levels, improve our national economic performance and maximise on our human potential.

Allow me to briefly outline to you a few examples of initiatives that have been taken by my government over the past two years and which are specifically targeted to reduce the welfare gap in as smooth a manner as possible. These initiatives fall under three categories.

The first category deals with initiatives which aim to maximise on our human resources. We have taken and we will continue to take steps to reduce unemployment, increase vocational skills and retrain our labour force. We are aware of the fact that the registration system we have adopted in Malta for a very long number of years gives us an incomplete picture of our potential labour supply. There are people who are willing and able to work, but who refuse to register for work. We need to know exactly who these are in order to fine-tune our policies in encouraging people to join the labour force. In this context, the Labour Force survey which has been undertaken by the Central Office of statistics will give us a useful indicator and will provide us with an innovative approach in our employment strategies.

Similarly, we have taken concrete initiatives to increase the participation rate of our female population, and we intend to continue strengthening this aspect by legislating on gender equality and discrimination aspects. Similarly we will continue to provide support for all those who have faced or are facing specific social problems or who have special needs.

Allow me to add that my government's insistence to introduce adequate health and safety measures must also be seen within the context of a wider strategy to address the welfare gap issue. Reducing and possibly eliminating accidents at work, protecting our human resources and instilling a culture of high standard work ethics, is central to the sustained economic development of our island. But is also a very concrete step in addressing one of our major causes for the increase in medical and health expenses as well as for the increase in invalidity pensions and other benefits.

All of these initiatives have the beneficial effect of (a) maximising our human resource pool and (b) reducing the number of economically inactive people and therefore reducing the number of people who will otherwise be dependent on welfare systems for their daily living.

The second category of initiatives focuses on the need to eliminate abuse of our welfare systems and to introduce better efficiencies at all levels. I suppose you are all aware of the determined effort that has been undertaken over the past twelve months in order to eradicate abuse of the system, both on the social security level as well as on the tax level. This was the direct result of close collaboration between my Ministry and the Ministry of Finance when, earlier in 1999, we both re-assessed the whole social security network of benefits. As a result of that exercise, we concluded that the social security network is well regulated. But we also concluded that all those benefits which are means tested, necessitated that we send a loud and clear message to all beneficiaries — namely that we have the responsibility to make sure that maximum benefits are paid to those who are in real need.

The third category of initiatives have a different flavour. They are intended to project the message that addressing the welfare gap issue and, in the process, guaranteeing the sustainability of our social safety net, is a responsibility which must be shouldered by everyone. Government is prepared to take the lead, but in making this statement, we reiterate our strong belief in social solidarity and collective responsibility. The challenges that Malta faces, are not just the challenges of the government. They are the challenges of the whole nation.

This is precisely why earlier in 1999 government set up a high powered National Commission with the mammoth task of reviewing our social welfare systems including identifying those medium to long term solutions which are necessary for us to sustain and, if possible, improve the level of pensions and social security benefits.

It is also the reason why we have taken the decision to widen the MCED's role for it to encompass the social aspects of our development as a country.

Finally, it is the reason why we continue to encourage and support civil society in Malta to participate and to contribute towards the generation of economic and social wealth.

Allow me to conclude by stating that, in a world harried by economic interdependence, the risks of turmoil in the financial markets and the demands of intense competition, there is every justification for sheltering social welfare systems from the vicissitudes of the market and the risk of financial unsustainability. Perhaps the liberalisation of trade and the tendency towards globalisation are having over-all positive effects. But if there are winners, there are also losers. International competition tends to aggravate inequalities. It discards people — workers who are victims of closures or reorganisations of enterprises, workers with low skill levels or whose skills have become useless or obsolete and so on. All this makes social welfare transfers more necessary; for it is a means whereby the strong can come to the assistance of the weak and where the weak can seize the opportunity to regain self-confidence and self-fulfilment.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt