30 November - 6 December 2000

Social Welfare: No such thing as a free meal

A major economic challenge for Malta

One of the major weaknesses in this year’s budget presented by Finance Minister John Dalli is the lack of action being taken regarding the ever-growing welfare gap. In his speech, Mr Dalli said that “unfortunately, the welfare commission has still not presented its final report. It is expected to do so by the end of the year”. Yet, a report in a local paper yesterday revealed that the commission’s work may not be ready by the end of December. Earlier this month, a one-day conference highlighting the social welfare problem was held at the Corinthia San Gorg. The conference, entitled “Social welfare reform: An economic challenge and a financial service opportunity”, was organised by the Economic and Management Consultancy Services Ltd (EMCS) and Middle Sea Group. The following are excerpts from some of the presentations. By David Kelleher

Dr Joe Pace – President, Foundation for Medical Services
Prof. Frederick F. Fenech – Prof. of Medicine, University of Malta
Quality health care costs money and if we are to keep up with the advances of medicine. These have to be paid for. Alternately, choices in the distribution of resources will have
to be implemented with all the unpleasant consequences of rationing, explicit or otherwise. In addition, the imminent spectre of an increasingly aging society with its pressure on pensions and health care brings a further twist into the equation.
European social security systems, although diverse in many ways, have developed with acceptance of the concept that each citizen has an unwritten contract with the government – namely, that in return for a payment usually related to income, he/she is guaranteed an acceptable level of quality care and that no citizen will face serious financial loss on account of illness.
There are differences in methods of financing and benefits available. There are also differences in the contribution from general taxation, compulsory social insurance, and out of pocket payments. In addition, most countries, but not Malta, will provide medication for all citizens with either a prescription fee (UK), or at a percentage of the cost.
It is one of the norms in any decent society, small or large, that major risks are shared between all members. Health care is high on this list with the accepted European dictum that no person should face financial hardship on account of ill health.
Besides the provision of paid sick leave and other benefits, this must include the actual cost of illness. It is also of benefit to the employer/society that the ill employee returns to his job as quickly as possible. Thus, utilising the best treatment available rather than merely one that we can “get by” which also makes sound economic sense.
Does our present system favour cost effectiveness or could a rapprochement between public and private health care result in far greater efficiency present and future?
Various possibilities of incorporating both systems into a unified co-operative effort come to mind:
Having every person registered with a family doctor or group which would be an integral part of the community health care team is markedly overdue. The family practice becomes the reference point for health care in prevention, before, during, and after hospitalisation. This doctor has a vital role to keep hospital care to the minimum. He will be crucial to the success or otherwise of an ambulatory surgery programme by providing necessary pre- and aftercare in an organised manner. Family doctors, the leaders of the health care team, should become independent contractors. Health centres can be redimensioned to serve as Emergency Care and perhaps outpatient centres for certain specialities that do not ordinarily require high tech back up.
Public and private hospitals have duplication of staff, equipment, and procedures. Vital operations at SLH are cancelled because bed space is choked with convalescent patients or others who need little in the way of highly specialised nursing. At the same time, private hospital beds, and indeed many in 2-3 star hotels remain empty and not utilised. Long waiting lists for procedures such as hip replacement that although not life threatening, may mean all the difference between an independent existence and one that relies on others. These should be carried out privately with government support if the waiting time is unacceptable.
Common sense would seem to dictate that governments would do well to encourage expansion of the private sector since this would help relieve the ever-increasing load on public facilities. A financial incentive in the way of recognition that the private care user has foregone his right to public sector use is long overdue.
In the field of the elderly we should aim to keep these persons in their own environment as long as possible. Social services and health services need better cooperation and should liase with voluntary organisations to maximise the level of care. Joint ventures between public and private sectors for long-term care need urgent consideration.
Mario C. Grech – Chairman, Middle Sea Group
The current State pension scenario is one where existing pensioners, through their associations, are raising complaints on the inadequacy of the level of current pension benefits. Together with the Unions, they are insisting on remedial measures to remove anomalies in the present State pension scheme. The main issue to be addressed, as far as the pension dilemma is concerned, is not only one of inadequacy but one of sustainability, and this is directly related to economic activity.
Naturally one response to a projected worsening in the pension scheme’s finances is to consider the implications of changing the scheme. In common with the approaches taken by other governments throughout the developed world the options fundamentally consist of one or a combination of increasing the contribution rates required, or reducing the benefits provided.
The reduction of benefits can take a number of forms such as limiting the level of benefit increases (for example, in line with price inflation as opposed to wage inflation), limiting the levels of pensionable salary, or increasing the retirement age.
It is thought that the most acceptable of the available frameworks, as in other domiciles, is likely to be based on a three-tier concept. The first tier is the basic State pension operating on the lines of the current scheme with the introduction of the required changes (providing a basic pension safety net). A second tier operated as an additional funded optional occupational scheme supplements this. The third tier allows for an optional enhanced retirement scheme involving savings and investment vehicles.
A more radical solution for Malta to reduce the financial burden on the State scheme first tier, would be to permit some degree of opting out of the State scheme in favour of a private sector funded pension arrangement. I do not feel that this is the way forward. I still feel that the existing system should act primarily as a safety net and continue to be managed by government.
If a second tier could be introduced, even if in the initial years on an optional basis, the main issues to be considered are:
What level of benefits should the State provide through the first tier and what benefits should the second tier arrangement provide for?
If the second tier is on a funded basis should the benefits be on a defined contribution or a defined benefits basis?
Should government or the private sector manage such a tier?
As in Malta, these questions have been the subject of considerable debate in many developed countries seeking to deal with demographic trends undermining the finances of their traditional pension arrangements.
The second tier should be funded rather than based on a ‘pay as you go’ system and the private sector would be a better-suited medium rather than the State. As entering into this tier is optional, it would be best to allow for contributions by both the employee and employer.
Moreover, collective bargaining should be used in selecting whether the scheme would operate on a defined contribution or a defined benefits basis. However, such a scheme must be supervised by an appropriate statutory and regulatory regime, and this is a sine qua non. Furthermore, the State should seriously consider the introduction of tax incentives to encourage the development of second tier funded optional occupational pension schemes.
The main advantages of establishing the second tier on a funded optional occupational basis are:
Funding defines quite clearly the pension entitlements and contributions of individuals. Unlike pay as you go arrangements, funded schemes are not as vulnerable to demographic changes in the ratio of pensioners to workers and changing attitudes at the acceptable levels of contributions from the working population.
The assets generated by funded schemes produce a pool of capital, which, some economists argue, is also beneficial to the operation of the economy.
Disadvantages of the funding approach are:
There is a need to achieve a rate of return on invested assets. If assets, producing a real rate of return after allowing for inflation, are not available, then this approach to financing pension costs is rendered inefficient.
It is necessary to ensure that appropriate arrangements are made for the proper management and administration of the pension fund assets. If expensive regulatory, administrative or distribution systems are necessary, then the value of the benefits can be eroded.
I am suggesting an optional entry approach, through collective bargaining coupled with the removal of the disincentive created by the National Insurance Act. As you are aware, under the present legislation, any other contribution to one’s pension is deducted from the government pension.
One is entitled to a maximum pension of a maximum of two-thirds of one’s income based on the best three years of the last 10 years subject to a ceiling of Lm6,462. However, at present, a person is allowed to buy a retirement plan (such plans are already in existence), but these cannot be arranged collectively. Indeed, in such circumstances it works against the individual. I feel that once this disincentive is removed, and entry is made optional, funds allocated for occupational pensions may grow.
I feel that, with the maintenance of the first tier and the second tier funded optional occupational scheme in place, the concept of sustainability of both contributions and benefits in the first and second tier will be reinforced. My view is that if the State pension scheme is modified to ensure that it is financially self-sufficient then there is a strong case in Malta for a second tier optional occupational pension. Whatever alternative the Authorities may decide to embark upon, it must be borne in mind that any changes to our pension structure can only be operated and implemented on the basis of both a “political” and “social” consensus. Achieving this may not be easy.