19 January 2005

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Pensions Reform: No easy solution
Family and Social Solidarity Minister Dolores Cristina puts forward her ideas on pension reform at last week’s seminar on the topic organised by the Malta Employers’ Association. In her address, Minister Cristina warns that the issues involved are complex and there are no easy solutions, but delaying or ignoring these vital decisions would be socially irresponsible.

This seminar is also a launch, a kick-off of the Great Pensions Reform Debate, an issue that is obviously high on the agenda, not only of your Association but also of a large number of constituted bodies and organisations. And rightly so. The facts stare us in the face and the way forward is for Government, for the Social Partners, for Civil Society in general to discuss issues, to thrash out issues, controversial as they may be, in a concerted effort to achieve win-win solutions.
Welfare Reform is currently one of the challenges facing developed countries. Several governments have shown the political maturity and the will to tackle this thorny issue. Some prefer to advance their political agenda by postponing important decisions, thereby jeopardising the nation’s future well being. Not so in Malta. This Government is assuming the socially responsible but, undoubtedly, arduous task of initiating the debate that is expected to lead to a satisfactory long-term result.
At the very outset of my contribution I hold it pertinent to underline the fact that the White Paper does not represent Government’s views but is the result of the conclusions reached by the Pensions Working Group which the Prime Minister appointed in June 2004 with the brief to review, inter alia, all work carried out by successive administrations on Pensions Reform, to identify the challenges facing our country to secure an adequate and sustainable pensions system and to submit proposals and recommendations for Government’s consideration, after analysing the current local pensions system as well as international trends on issues and solutions provided for pensions reform.
The Government’s current position is that it will present its own views after it has evaluated the reactions and feedback arising from the national consultation and discussion process, which will take place in the coming months.
This morning, in this short contribution, I will address two matters in particular.
First, the question: Is Pensions Reform really necessary?
Secondly, what considerations should Government take into account with relevance to employers?
To the first question: Is Pensions Reform necessary - I answer an unequivocal YES, it is necessary. This has nothing to do with politics. It is a rational conclusion based on Facts.
In essence and very briefly, allow me to revisit the scenario that has been depicted many times.
Malta’s population is ageing with an elderly cohort that will practically double in 50 years. Malta’s population is shrinking and it will decrease by over 50,000 in half a century. Malta’s replacement rate - its birth rate - is falling and there is little evidence that this trend will change upwards dramatically in the future. It should also be noted that the demographic changes I refer to will impact not only the sustainability and adequacy of pensions but also the sustainability of the health service. Increased age expectancy brings with it increased demand for health services. The mean cost for institutional health services of a person over 75 years is LM600 compared to LM340 for a person who is 65 to 69 years old. Thus, as people live longer the cost of public health will increase dramatically - which may indeed be more difficult to deal with than issues related to pensions.
Given that the current system is based on the Pay As You Go method - where today’s workers pay for today’s pensioners - the outcome of these facts is very simple to analyse. Tomorrow there will be fewer people to pay for the workers of today who will be the future generation of pensioners.
This conclusion was not drawn out of thin air. It is the conclusion reached by every technical study carried out since 1997 - irrespective of the political identity of the Government of the time or whether this study was carried out locally or by an international firm of repute such as Watson Wyatt or by a supranational organisation such as the World Bank. The conclusions reached are all the same; unless reform is induced and induced at the earliest possible, the adequacy and sustainability of the social contract that a pension constitutes will be heavily jeopardised.
That’s the crux of this particular issue. Let me elaborate a little further.
Humanity has been striving for better health and longer lives for centuries. Scientific advances have happily resulted in an improved quality of life, in the elimination and control of diseases which our foreparents battled with in vain. Today, infant death is, thankfully, the exception. The premature mortality rate is very low; more and more people live to an advanced old age as opposed to a young old age. We no longer assume that the enjoyment of life or the acquisition of new accomplishments are behind us when we reach retirement age. We still expect to live to the full, to enjoy good health, or, in the lack of that, to find the required level of care and comfort; we expect to enjoy a decent standard of living and certainly we aspire to continue affording the lifestyle to which we have become accustomed throughout our lives.
There are clearly significant economic implications brought about by ageing societies. Most of the discussion in developed countries has so far focused on the organisation of pension systems and mechanisms that presume that a portion of public goods and services provided by workers are distributed to older people who have retired from work.
However, the ageing of societies goes beyond government financing and structures and includes declining productivity and the resultant effects on the standard of living. Retirement allows the older sector of the population to continue consuming without directly contributing to production.
Studies, such as that undertaken by the World Economic Forum last year, have shown that over the last twenty years or so the average retirement age in a number of developed countries has fallen. Moreover, the average retirement age for women tends to be younger than that for men. These are two factors that need to be considered in evaluating our options for the future. The retirement period is increasing in two dimensions: people living longer and retiring earlier. Now, if we were to widen our concern from the cost of pension systems to the broader issue of sustaining economic growth and standard of living, the ageing of society will essentially translate to how much productivity and general welfare is being lost when a person stops working. From the 1960s to the 1990s, most developed countries have had steady growth in labour supply and productivity. This created expectations of further improvements in living standards and prosperity. Such goals, however, will become increasingly difficult to reach, given the demographic developments taking place.
At the other end of the lifespan, fewer births are being registered. In comparison to statistics that go back to the mid-twentieth century, to post-war years, our birthrate has taken a dramatic dip downwards. Families with four or more children are fast becoming the exception, certainly not the rule. Couples are marrying at a later age and the average age for new mothers has gradually moved upwards. Women are simply waiting longer to have children. And they choose to have fewer. The reasons for this are multiple, a blend of social and economic factors.
The number of retirement pension beneficiaries in 2003 stood at approximately 38,000. This number is expected to shoot up within fifteen years, and to more than double the current figure in fifty. Today, four persons of working age contribute towards the pension scheme of every beneficiary. In fifteen years’ time the number of contributors will go down to slightly above two for every person receiving a pension. Population ageing will require the establishment of expenditure priorities that will include making difficult choices between a number of equally worthy social objectives.
In the light of conclusions reached by every technical study carried out in the past eight years, both locally and internationally, we should move away from querying whether we need a Pensions Reform to safeguard future generations and focus our discussion on the instruments of change or reform that Government should apply to provide an adequate and sustainable pensions system.
Let me look at this particular matter with reference to the impact on employers. Given the time constraints I will concentrate on a few aspects only.
I am not an economist so I will put across the concept in a layperson’s language. In Malta we operate a mixed economy that attempts to blend, to fuse the strengths of the State with that of private capital. I am sure that we all agree that private capital and its generation to render maximum wealth for both the owner of that capital and its consequential multiplier effect form an important component for economic growth. Thus we must take into account the important consideration that to the extent possible private capital should be retained within our local economy, to generate national wealth by engendering national growth. Let me add something to this statement. As a society, as a nation we operate within the concept that the maximisation of private capital should be within the ambience of a social contract that ensures and secures adequacy and dignity for all our citizens. This means that we achieve the balance between what could potentially be two conflicting interests; we have to achieve the exploitation of wealth without the exploitation of the rights, dignity and interests of the citizens.
There are two ways as to how we can achieve this balance.
In terms of the impact on the maximisation of capital - either through reducing competitivity or increasing costs of production or discouraging confidence in the economy - the instruments for pensions reform must consist of a basket of measures that are introduced in a supporting manner incrementally as against a single measure that is introduced radically. Thus, for example, the resolution of the issue of adequacy and sustainability of pensions by increasing Class 1 contributions from 10% to 15% should be, and must be avoided.
In terms of the maintenance of the social promise, employers have an obligation to continue to pay a share of the contribution for a person’s pension, a share that should be equal to that which the individual worker pays.
I mentioned earlier that we are facing a decrease in population. This in turn implies that economic expansion and growth will be impacted as the owners of private capital may not find the human capacity to expand their interests. This could potentially result in two measures…either the flight of capital abroad or the importation of non-Maltese workers.
We have to consider ways of increasing the labour force despite the demographic realities. We have, primarily, two very important sources of human capital that we, as a nation, do not capitalise. The first is women. Only 33% of women are in the formal economy. The second are elderly people, people who have accrued experience and who in an ageing but extended life expectancy are discarded too early from the labour market. The current pensions system discriminates against both women and the elderly. In fact it actually encourages their exit from the labour market. This cannot continue to be so. Critical human and intellectual capital cannot be allowed to seep out of the labour market and mechanisms to induce them to enter or to remain in the labour market must be introduced. This also applies to the introduction of such mechanisms in the pensions system.
Malta’s National Action Plans on Employment and on Poverty and Social Exclusion which we launched in 2004 incorporate a number of initiatives and programmes that encourage and support women workers, persons with disabilities and the long-term unemployed. The European Social Fund and European Social Development Fund have allocated substantial sums towards the implementation of such projects.
Malta has no natural resources other than intellectual capital. In an era of post industrialisation where the economy of nations is underpinned by ‘knowledge’ this one natural resource that we own has become fundamental to our economic well being.
We talk of the need to render Malta a competitive knowledge-based economy. This is a lofty objective that will only be attained if we introduce policy mechanisms that support the maintenance and accrual of knowledge. For knowledge to be inculcated in our society we need to establish lifelong learning as a critical goal of our working as well as our educational environments.
Knowledge demands continued professional development, reskilling, re-training, re-education and specialised studies throughout one’s working career. Education cannot and must not stop following completion of secondary or tertiary or post-tertiary, for that matter.
This particularly holds true in a world where businesses and economies are dependent on fast changing technologies. The strengthening of knowledge throughout all stages of an individual educational and working life must therefore be facilitated. Thus the issue of career breaks in relation to lifelong learning and its impacts on a person’s pension must be considered in the design of a new pensions system.
The reform of the pensions system is a major undertaking. It can only be taken in a balanced manner if all the stakeholders and players agree that the best way forward is a consensus one - which demands trade-offs amongst sectorial demands and interests that when merged together provide us with the best solution that strengthens the nation collectively.
While the status quo may be a comfortable way out in the short-term, starting the process of change now is imperative if we are to have a long enough period of time to allow for a smooth transition in which to implement the necessary reforms. These reforms will ensure that today’s workers will not end up as tomorrow’s poor pensioners.
Government intends to take the bull by the horns, and following a nation-wide debate, face the challenges presented by these realities. It is this timely and decisive stand that will save this country much of the hardship faced by other countries that either ignored the issue or were too late in facing the facts. If no action is taken now, it may soon be too late to rectify the situation without unnecessary shocks to the system. Pension Reform will require effort, co-operation and resilience, but will pay dividends in the long term. Achieving our economic and social targets depends on how we will modernise our systems to respond to the present and future economic and social realities.
An informed and serious debate needs to take into consideration the costs and benefits involved and lead to a conclusion that will produce a win-win long-term solution. Following this consultation process and national discussion, Government will be able to design an appropriate system based on the assessment of the feedback received. The issues involved are complex and there are no easy solutions, but delaying or ignoring these vital decisions, tempting as it may be, would be socially irresponsible and this Government believes in moving on with courage and determination.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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