24 - 30 August 2000

GWU says private pensions not the answer to welfare gap

by Anthony Manduca

The General Workers' Union, in its report "Guaranteeing the future of social security in Malta" has made it clear that the private pension solution for the country's welfare gap problem "is simply an illusion". The GWU said that those individuals who are pushing the idea of private pension schemes as a solution to Malta's pensions problem were simply conducting a marketing campaign in order "to attract the majority of workers to buy their products".

The GWU said that the main player in the old-age retirement provision industry in the majority of European countries continues to be the State. It said this was also the case in the United States, Canada and Singapore. "Personal pension schemes in most countries are a voluntary additional provision that people make to top up what they receive from the State and the employer," the report said.

The GWU said the introduction of private pension schemes will do nothing to stop the increase in the number of elderly or stem the drop in the labour supply. "The financing problem will remain there. The pensions of present retired persons will have to be financed by the State no matter what happens. Furthermore, a significant proportion of the present workforce cannot be expected to finance its own pension. This is because the process of saving for a pension is a lengthy one, as a fund must be accumulated," the report said.

The GWU said that introducing private pensions will not automatically dispose of the State's obligation to provide a pension for present retirees, older workers and low income workers.

"Thus social security contributions will still have to be paid in order for these liabilities to be covered. At the same time, younger workers and new entrants to the workforce would have to pay premiums to accumulate funds for a private pension. As a result the new generations will end up paying twice, for themselves and for their parents. This is neither equitable nor politically acceptable," it said. The report says that there are two main countries, Chile and the United Kingdom, which have reformed their public systems through privatisation.

"These reforms were undertaken under the Pinochet and Thatcher administrations, both of which cannot seriously be credited as having a particular concern for social equity and low-income workers. On the contrary, these reforms were ideologically driven with little thought dedicated to their long-term implications," the report says.

The report says that in the UK the basic State pension was reduced to just 18 per cent of average earnings and the government carried out a massive advertising campaign to convince workers to purchase a personal pension if they wanted to retire comfortably. "As regards Chile, the reform was carried out in spite of its huge fiscal cost. In fact the reform, which was a shift to a mandatory private pension system, continues to be a main drain on government finances amounting to about six per cent of GDP per annum. To remedy for this cost, government carried out several cutbacks in expenditure, privatised most of its enterprises and raised the average taxation rate," the report said.

The report also says that private pensions are notoriously difficult to supervise and gave the example of insurance companies in the UK having defrauded 2.5 million persons between 1988 and 1992 by giving them the wrong advice.

The GWU says that the private pension pillar solution has also been criticised by mainstream economists. It quotes the World Bank's former chief economist, Joseph Stiglitz, as having told the bank to rethink its promotion of private pension funds in developing countries because this had been motivated partly by ideology. Mr Stiglitz is said to have pointed out four main problems that arose in countries where the World Bank's advice had been followed, namely, heavy transaction costs, volatility, regulatory issues and lack of insurance in the private market.

In conclusion, the report points out that Malta cannot escape the effects of ageing by simply dismantling the social security system. "To ensure sustainability we must start saving now to pay for tomorrow's expenses. This means we must curb the fiscal deficit without creating a social deficit, and at the same time introduce economic reforms that lead to faster GDP growth so that our society can afford to finance increased social outlays," it says.