07 MAY 2003

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2025: A Pensions Odyssey

Matthew Vella
Finance and Economic Services Minister John Dalli revealed earlier last week that the grey-haired time-bomb was ticking quite loudly, as Government entered into the first weak swings of addressing the long overdue pensions problem.
A lot of time had been wasted, he confided, and decisions and solutions seem to have been pledged.
The impending top-heavy structure that will start weighing upon the public coffers is considered to be a consequence of the non-dedicated pool of tax revenue that serves to finance all government contributions from children’s allowance to pensions.
Contributions are already high and pensions are also relatively generous in proportion to wage levels. Speculators are now already betting that an increased pensionable age will be mandatory when pension reform is introduced in Malta.
British consultants Watson Wyatt Ltd had described the future of the Maltese pensions system back in their 1999 Pension Provision in Malta report as ‘alarming.’ The report had been commissioned by then-Finance Minister Leo Brincat in August 1998.
The MCED’s Averting the Pensions Crisis (1999) predicts a pensions bill increasing to Lm720 million by 2025, and proposed the increase of the pensionable age from 61 to 64, with the introduction of a two-tier pension system and a mandatory private pensions scheme.
A couple of years ago, the Pensions Reform Commission was set up. To date, it has not produced a single report.
In March 2000, an interim report was presented in Parliament by the National Commission on Welfare Reform.
The Commission’s brief had been to recommend proposals for funding the pensions reform, as well as assessing the social and economic impact of the reform. The forecast was of an impending top-heavy social service sector.
With better life expectancy and less babies being born, it reported a slow decrease in the number of young people aged between zero and 15 years. Birth rates had fallen in 1995 to the lowest rate ever in 25 years with 25,780. Between 1998 and 2000, according to the NSO, a still lower total of 13,023 births were registered.
The first strains of the post-war baby boomers have already started being recorded.
The people aged between 53 and 57 today are amongst the largest segments ever to reach the pensionable age. And they are only four years away from retirement age. Eight years ago, the 1995 census counted 30,729 of these baby boomers. Furthermore, those aged between 43 and 52 today numbered 58,236 in 1995.
With falling birth rates and a greater pensionable population, it is clear that within four to 18 years Malta will progressively be facing an increasing welfare gap with a smaller working population to finance the social security pool.
Predictions signal that the ratio of retired persons to those of working age is expected to rise from 24.6 in 1996 to 43.6 in 2025, with just 2.3 workers for every pensioner. By 2030, population growth in Malta is expected to stop.
It is the strain on public finances that worries many, with ministers having to dish out the unpopular decision-making for the future of many workers and young people today.
But by 2025, the total figure for expenditure for benefits will have increased to Lm993 million, which according to the World Bank PROST model would have increased the welfare gap in Malta from 2.1 per cent of GDP to 18.7 per cent by 2040.
With this situation in hand, meeting the commitments for retirement pensions is definitely the next biggest issue following Malta’s decision to join the European Union.
The current pension scheme has a two-tired structure with a national minimum pension and the two-thirds pension. The former depends on the number of National Insurance contributions a person makes during his or her working life, while the latter is income-related.
There are also a number of ex-servicemen who receive a pension from the British government.
With no pension fund in place, the state pension system is financed from worker’s taxes, when in effect, it should be national insurance contributions financing future pensions.
In the UK, pensioners are guaranteed a minimum retirement income, a means tested pension linked to the rate of inflation.
UK pensioners also have an earnings-related pension financed by contributions, similar to the basic pension in Malta, except that UK employees may opt out of the public scheme if covered by occupational or private pension schemes. Retirement age stands at 65 for males and 60 for females, but is expected to go up to 65 by 2020.
In Germany there is no public basic pension but means-tested social assistance. However, the income-based pension is compulsory and the scheme is financed by contributions. The retirement age is 65 for males and 63 for females, which is expected to go up to 65 by 2004.
Malta too might have to face raising the retirement age to 65 for both men and women. Currently the retirement age stands at 61 for males and 60 for females.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
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