Sadly for us the cauldron for pensions is brewing at a burning rate and an acute problem is in sight irrespective of the current recession but more so due to changing demographics of an aging population. Politicians widely neither accept that demographic change and not the international sub-prime crisis, the euro stability nor are the credit crunch the cause of this brewing problem. There had been a steep decline in the fertility rate since the time of the baby boomers. At present, 18 per cent of the population was aged over 60. By 2025 that would rise to 27 per cent with a higher proportion than ever living well into their 80s, hence the pressure on pensions. Our pension system on a pay as-you –go is unfunded and will collapse by 2030 unless remedial action is taken now.
Naturally the structural deficit of our national budgets which has been on the increase for the past 25 years also undermine the sustainability of pensions .The feeling of déjà vu is back again that this problem is not for our undoing but we can pass it on to our children to bear the cross. Live for today and let the devil take the hindmost as for the future is a faulty political mantra. All this has been said before and the voters are now fed up being warned about the low participation rate in the labour force, which was among the lowest in the EU and, particularly, the extremely low female participation rate. Past profligacy has caught up with us with a vengeance. True, a bold attempt was made by the ex-minister of finance John Dalli who increased vat rate by 20% with the honourable aim to set the extra revenue for health care costs. This did not materialize and the FSS rate of 10 % deducted from workers goes to pay a myriad cocktail of social services, plus spiralling health care and any balance goes to annual pensions. Lucky for us the study working group set up by government (but without the opposition‘s participation) to recommend a serious and sustainable pension structure finished its monumental report by 2006.
The Bill based on this study was approved in parliament after the opposition voted against the clauses raising the retirement age to 65 ( staggered over the next 15 years ) while the contribution period of National Insurance was increased to 40 years. We note that the opposition could not agree with the raising of retirement age and had questioned several existing anomalies in the pensions framework .The study group advised that in order for workers to qualify for a full pension, they must pay national insurance for 40 years, and not 30 years . Their pension would be calculated on the average income in the last 10 years, instead of the best three years in the last 10. To sugar the pill of higher contributions the pension age increase was staggered and we shall visit some FSS increases next year. This avoided the riots held in Paris but acted as a mere palliative .In fact we note that for those workers born on or after 1962, such workers would still be able to retire at 61 if they would have paid national insurance contributions for 40 years. Those born between 1952 and 1961 were having their retirement age risen gradually but they too would also still be able to opt for retirement at 61.
In their case they would have had to pay FSS contributions for a period of 35 years. Workers who opted to retire at 61 rather than on 65 would receive their full pension (as long as they paid an adequate number of NI contributions) but they would not be able to have a gainful occupation until they turned 65. This sounded as a fair compromise and was well received. Another improvement concerned those born on or after 1962 which benefitted by the elimination of the distinction between employees, self-employed or self-occupied.. For those born on or before 1951 the capping would rise up to a maximum of euro 17,400 for those born after 1962 the cap will increase to euro 18,400. From 2014 the capping would rise on the basis of a new formula based 70 per cent on salaries and 30 per cent on inflation. A two thirds pension is then worked out on the eligible cap. For those born before 1951 the best three consecutive years in the last 10 years were calculated while in every other case the calculation was to be made on the best 10 calendar years, not necessarily consecutive, in the last 40 years of their employment. Notwithstanding all the five years during which the study group deliberated there is still a growing number of people who are already seeing that their pension is inadequate.
As inflation eats in the increased cap of euro 18,400 one finds that the only solution for young workers is to have a second pillar properly supported by tax allowances. This facility is still on the back burner as the government felt second pillar pensions should not be introduced now so as not to increase cost burdens on industry at a time when Malta was trying to improve its competitiveness ( currently in 55 th place worldwide ). With hindsight we note that five years ago before the onset of the global recession government had also considered starting off second pillar pensions by investing one per cent of revenue from national insurance contributions made by employers and workers but that would have meant a euro 46 million impact on public finances. This was considered too high a cost. Paradoxically since 2006 we had no problem to find spare cash of over euro 120 million to pay off redundant workers arising out of shipyards privatization and the acquisition of an ageing bus fleet to smooth the way for liberalization of public transport. Obviously it is all a question of priorities and making the right choices. So nobody can honestly blame the international recession as the reason why the second pillar was not introduced in 2006 as a mandatory measure. Understandably the insurance industry has lamented that over ten years have been wasted tinkering at the right solution.
The third pillar is again not in force not even on a voluntary basis. When the bill was discussed in parliament some questioned why government had not introduced voluntary third pillar pensions, and the associated tax benefits, immediately. The official reply by the finance minister was that the study group headed by Mr Spiteri Gingell (the latter was also a top official of Enemalta during the BWSC saga and is still retained in the group responsible for the final report on pensions which is due by end of this year) had advised that this would not be wise. The argument was that many people may end up committing themselves to third pillar pensions and then would find it difficult to shoulder the burdens of mandatory second pillar schemes once they were introduced. In 2006 the plan was that a final conclusive study will be issued this year. One hopes that the second and third pillar pension schemes would be introduced concurrently and the mystery on how they will be funded is solved .
One practical solution will be a proportionate cut in public spending but this poison chalice was avoided in last budget .Allocating a larger slice of revenue from national insurance is a non starter as this creates a shortfall in cash for other social services? A politically sensitive area for a government in mid-term. If, no sustainable recipe is found then more taxes will be the sour answer and yet surrealistically the budget avoided taking austerity measures .Questions arise as how would those who already had a private pension be affected? Would these people enjoy tax credits? What would be the administrative costs of the second pillar pensions and how can MFSA cope to adequately monitor the insurance industry that provides these products. Our regulators must learn a lesson from the Equitable Life debacle in UK. To conclude on a positive note in dire times of financial distress that is hitting the euro currency. It is wise if our politicians 's goal is to resist being popular in the short term, but be credible in the long term. The secret is to achieve a balance between contributors and pensioners, with adequacy and sustainability. Wise words but not easy to achieve.
by George M. Mangion
gmm@pkfmalta.com
www.pkfmalta.com
The writer is a partner in PKF Malta, an Audit and Business Advisory firm.
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