08 March 2006

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Business Today

A hole in the bucket

Government’s pension reform proposals have failed to tackle the issue of a supplementary pension, once again exposing the shaky state of public finances

Prime Minister Lawrence Gonzi, last week said that the much awaited bill on pensions will be presented to Parliament by June. He said the retirement age will be raised gradually to 65 for those who would have not turned 55 on January 1, 2007. The existing capping which has been frozen for 25 years at Lm6,750 on the two-thirds pension will be gradually raised in eight years to Lm9,000. Thus it has merely increased the contributions it will be receiving with one hand to pay out with the other.
Present pensioners will not be affected by the reform and private pension schemes will remain a voluntary option. However, the government still has to work out how and when a mandatory supplementary pension will be introduced because it does not feel it can impose heavier burdens on workers and employers by increasing the contribution percentage given the country's economic situation.
As can be expected the main issue will concern the government's decisions in this important reform that saw its birth 10 years ago. Naturally one would expect a lot of discussion in Parliament over such matters as economic growth, whether adequate tax incentives can be conceded, the impact on foreign investment, the creation of new jobs, the curbing of inflation, improvement and consolidation of the infrastructure, environmental policy and initiatives and the impact of running Mater Dei hospital on state finances. Sceptics may well complain that not much gain can come out of the reform unless the economics of the island can improve in the coming years and the deficit turns into surplus.
The spokesman for Alternattiva labelled the proposal a "watered down" reform, expressing concern that the government "shied away from carrying out a serious reform to bring about a culture change so that those who can afford it will save for their retirement over and above their government pension". Again the opposition states that as the party in government is not performing up to standard, then by adding the second pillar it will add more burdens to firms which in turn may well decide to cut their losses by shedding workers. On the contrary the government spokesman does not feel it is imposing burdens on workers and employers by increasing the contribution percentage for the so-called second pillar pension. In their opinion any extra contributions levied under the second pillar will be invested in funds administered by financial operators to ensure an adequate standard of living for pensioners.
In the words of the Prime Minister, government intends “to work out how we can take part of the 10 per cent already forfeited and invest it in a second pillar pension rather than increasing the national insurance contribution, given the country's economic situation."
Obviously, this leaves an element of uncertainty among business operators but Dr Gonzi reaffirms that if this turns out to be impossible, the supplementary pension will be introduced on a mandatory basis at a later date when the economy is in better shape. So again, the reform is stalled as regards the second pillar since it is made contingent upon the government's fiscal targets, since reducing one per cent from national insurance contributions means reducing the government's revenue.
It is a pity that after the long delay in the issue of a White Paper and now that the final report of the working group and seven impact assessment reports were handed to the government last summer the decision on the second pillar is still not finalised. They made a pragmatic suggestion to leave untouched the NI contributions as is - 10 per cent each from the employer and the employee but reallocate one per cent of each into this fund. This seems to be a win-win solution which means that employers and employees are not burdened with further deductions.
But given the state’s finances can it spare two percentage points off its current revenue stream? The answer is a definite ‘no way’ from government quarters. It is government’s fear that it cannot afford to make up this amount. No cut in revenue and no second pillar; at least not until 2010 when state finances, hopefully register zero deficits. Why has the reform which has dragged on for a decade been so mired in drama and upheaval?
The answer may well lie in the gross apathy that has surfaced on the subject. It is pertinent to ask where are all those personalities, including Members of Parliament, who regularly write to local newspapers, are now, because they seem to vanish into thin air when the subject of reform reappears. Could this be because politicians enjoy enhanced pension schemes which are upgraded according to inflation?
It was June of 2003 when PKF organised a national conference at a major hotel and gathered all the stakeholders for their views. Then it was felt that it was a major public problem, even though the unions took a laid back stance and waited for the government to stick his neck out with the issue of a White Paper. Since 2003, the pension reform has become a Cinderella topic. There has not been a TV or radio discussion programme on this subject either. Popular talk shows on TV and radio have abandoned the subject maybe because they know it is a dead end street and the public is immune to any other shocks coming out of the reformed pension laws. On the other hand, constituted bodies replied in their usual stance that they need more time to evaluate the issues involved.
They comment that the recent strategy by government to give early retirement to Drydocks, Enemalta and Kalaxlokk workers goes contrary to the notion of an increased retirement age. In this context one notes that the trend within the EU to shed surplus staff through early retirement does not make sense and should be stopped, according to Jean-Philippe Cotis, chief economist of the Organisation for Economic Cooperation and Development (OECD).
Depressing figures from recent press announcements reveal the likeliness of a bleak future for today's young workers. For the typical young worker at 35 years of age retiring in 2033 the figures are even gloomier. Working women's plight is even worse. Their combined impact of lost earnings and pension contributions from taking career breaks to have children, plus lower salaries on returning to work, mean their pension is likely to be low as inflation will eat into the present capping system based on the 2/3 scheme. Shortly we shall see the reactions of unions who were waiting nervously for government’s reaction on which way to proceed with the recommendations of the final working group.
It goes without saying that a solution needs to be found. Specifically, rigidities in the labour and internal market exacerbated by ingrained work practices in over-manned state enterprises have become an unwritten law. For a start there must be an increase in gainfully employed including a higher participation by the female workforce which is the lowest in Europe. Economists agree that two initial steps are necessary. First, the Maltese economy must engage the productive capacity of all and provide everyone with a decent sustenance - nothing less should be acceptable. Second, serious reforms must strengthen public income support and pension schemes - including better and more honest administration, rigorous collection of taxes, tax relief for second pillar private schemes, and the like. Ironically we waited 25 years to reform the capping mechanism only to find that there is a hole in the bucket. Can we initiate the machinery for priming the pump of an overdue second pillar? I hope we can.

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