Pension reform

The news, revealed by The Malta Independent on Sunday, that practical proposals are being considered on how to change Malta's pensions system in order to make it more sustainable is to be greatly welcomed. It is understood that the National Commission on Welfare Reform, which was set up in 1999, recently began working on a final report which will contain specific proposals to amend the country's social security system.

The most serious problem with Malta's social security system - which has long been ignored by successive administrations, is the welfare gap. This is the deficit between what the government spends on pensions and other social services and what it receives in income, mainly from National Insurance contributions.

Although the welfare gap has been widening every year and will continue to do so, no concrete action has been taken by any government to do something about this very alarming situation. The setting up of the National Commission on Pension Reform last year was a step in the right direction, and one hopes that its proposals being considered are courageous and go to the root of the problem. Half measures will not do, neither will succumbing to union pressure over opposition to private pension schemes.

It is perhaps worthwhile recalling the gravity of the welfare gap. Last year's conference on pensions, "The Pensions Dilemma", organised by KPMG, arrived at the following conclusions:

Stated at 1998 prices the maximum pensionable income from employment payable by the Social Security Fund has declined from Lm7,427 per annum in 1982 to Lm6,320 in 1998.

The maximum pension payable, again stated at 1998 prices, has accordingly declined from Lm4,951 in 1982 to the 1998 level of Lm4,213.

Given an annual inflation rate of 2.5 per cent and assuming that the current system for computing pension increases is continued, it is estimated that the maxima will decline further by 2025: to about Lm4,746 in the case of the pensionable income and to Lm3,164 in the case of the pension payable (both estimates stated at 1998 prices).

Concurrently, real average employment income per employee has increased significantly. The average yearly income from employment per employee has increased at 1998 prices from Lm3,040 in 1982 to Lm4,520 in 1998. If the average increases experienced since 1982 is maintained the average real income from employment will increase to about Lm10,264 per employee per annum by 2025. If one takes the average increase experienced between 1988 and 1998 this estimate would increase to about Lm12,400.

Consequently, the ratio between the maximum pensionable income from employment and the average income from employment per employee has declined from 2.44:1 in 1982 to 1.40:1 in 1998 and it is projected that it will fall to 0.46:1 by 2025 (based on the more conservative real income estimate of Lm10,264 per employee).

A 35 year-old currently earning Lm6,000 per anum would be expected to retire in 2025 on a salary of about Lm13,626. The estimate of

the maximum pension payable in 2025, at 1998 prices, is of Lm3,164, which is equivalent to 23.2 per cent of the retirement salary, and not two-thirds.

It is clear, therefore, that the situation is indeed alarming and cannot be allowed to continue. Bold thinking and radical action is needed to prevent our pensions system from arriving at unsustainable levels by 2025. Just imagine receiving a ridiculous pension worth Lm4,746 in 2025!

The solution is not to increase national insurance contributions as these are not directed into a specific fund and are often used for other social security benefits, nor are they invested. The national pension system should continue to provide a minimum level of pension which, wherever necessary, should be supplemented by private pension schemes.

The government therefore, has the duty to legislate tax incentives for such schemes and we hope that this is a principal recommendation of the National Commission on Welfare Reform.

We are not calling for the dismantling of the national pension system but it is clear that this system on its own cannot guarantee a decent livelihood for pensioners now nor in the future. Of course, getting rid of the deficit should help improve our social security set-up, but cuts in government expenditure would have to take place if we really want to improve public finance. We can't have our cake and eat it. Let us hope that the government has the courage to think long-term for once.