Malta has no ring-fenced pension fund wherein our social security contributions are placed in such a fund and invested to create intergenerational returns whilst accounting for immediate (current pensioners) and long-term liabilities (regarding future pen

Malta has no ringfenced pension fund wherein our social security contributions are placed in such a fund and invested to create intergenerational returns while accounting for immediate (current pensioners) and long-term liabilities (regarding future pensions). As I explained in my last blog, our pension system is Pay As You Go (PAYG). It has been compared to a Ponzi scheme, as the guarantee of an adequate pension for future pensioners depends on the assumption that when they retire, there are sufficient workers to pay for their pension.

Social security contributions paid by persons in the labour market today go to the Consolidated Fund– to pay for current contributory and non-contributory pensioners’ benefits and act as a general revenue stream financing the government’s expenditure. In the strategic reviews carried out since 2007, we sought to assess the pension system’s health by “creating” a State of Account of a Notional Social Security Contributions Fund. This was based on contributions received and expenditures incurred regarding outflows on contributory benefits.

The following presents a performance of this State of a Notional Social Security Contributions Fund:

• In 2004, this fund had a surplus of €91m, which by 2010 had fallen to €18m. The deterioration of the surplus balance resulted from the fact that in the mid-2000s, the baby boomers started to retire. The reforms introduced by the government in 2007 regarding the pension system’s sustainability were yet to kick in.

• In 2015, the fund showed a health surplus: from one moving towards a negative balance, it increased to €75m. The primary reason was the increase in revenue that the government was garnering from additional amounts paid by both employers and employees as the Maximum Pensionable Income for persons born in and after 1962 increased, initially by three equal tranches, from approximately €16,400 to €20,900 between 2011 and 2013, and after that by the annual application of the 70% wage inflation: 30% retail inflation indexation formula. This considerable injection of revenue in the fund through increased contributions paid by persons born on and after 1962 should conclusively put to rest that this cohort constitutes an anomaly. As the MPI increased since 2011, persons in this cohort above the MPI have seen their share of contribution paid increase annually.

• In 2013, Malta had a change of administration, with the new government adopting an open immigration policy concerning third country nationals. EU EEA citizens could work in Malta following Malta’s entry into the EU in 2004. 2015 is in the early years of the Labour government administration and from when this immigration policy was adopted. While creating a “new” revenue stream, contributions paid by migrants were still, in my opinion, marginal at this stage.

• In 2017, the fund had a surplus of €124m, which increased to €192m by 2018. There is no doubt, at least in my mind, that the revenue stream from migrants’ paid contributions significantly impacted this positive surplus. Revenue from the continued increase in contribution payments by persons born in and over in 1962 positively contributed to this surplus. By 2019, the MPI reached €24,194.

This State of a Notional Social Security Contributions Fund does not cover liabilities. Liabilities may be classified primarily as follows. First – current pensioners. Life expectancy has increased yearly concerning males and females to 80 and 84 years since the 2004 reforms. Every year that increase in life expectancy increases the burden on the sustainability of the pension system – as an additional year of pension income has to be financed. Additionally, the pension system may sustain further pressure as the number of elderly persons past current life expectancy compared to persons between 18-64 actively employed.

Second, the pension payment of Maltese future pensioners. The funds start to accrue contributory income from Maltese people once they actively engage in the labour market. The fund will accrue 47 years of contributory if a person, born in and after 1962 and who retires at 65, joins the workforce at 18 years, and 43 if they do so after completing a first degree. Against this is the pension income payment outflow that needs to be financed as future pensioners retire and the life expectancy in their regard. Additionally, given that the contributory fund is an“insurance” system– contributory pensions are only one of the benefits, albeit the largest in terms of cost, and they carry intergenerational costs such as the payment of a widow/er’s pension, invalidity pension, etc.

The third liability relates to TCNs. Except for countries with bilateral agreements with Malta, a TCN must meet the same qualifying criteria as a Maltese person to be entitled to a contributory pension. For a person born in 1962, the qualifying criteria is 12 years. Research by different bodies showed that before the Covid19 pandemic, 50% of foreign workers (TCNs and EU citizens) left Malta within 12 months, and a further 20% by the second year. Concerning TCNs, a large majority will not qualify for a partial contributory pension. Some have argued that this is unfair and discriminates against TCNs. I argue otherwise mainly for two reasons. First, a TCN, if they are in insured employment, benefit from a range of social benefits that come at a significant cost – not least of which is free health care. Secondly, the qualifying criteria for a contributory pension do not discriminate between Maltese people and TCN.

A number, albeit not significant, of TCNs obtain Maltese citizenship and thus, the contributions they would have paid will account for the accumulation period required to qualify and obtain the full contributory pension entitlement. The fifth liability relates to EU citizens working in Malta. EU citizens are entitled to a separate pension from every country where they were insured for at least one year. This means that if an EU citizen worked in Malta for five years and returned to their home country, they would receive a pension from Malta and their home country proportionate to the periods of insured employment in each country.

While data for contributory expenditure is available for 2020 – €863m (NSO, 2022), I do not have contributory revenue for that year (data for contributory revenue is normally presented in an 18-month time lag as they are related to the tax base). I would assume that the Covid-19 pandemic negatively impacted the balance of the notional Fund. I further assume that post-Covid-19, with the economy again working on full cylinders and an optimised active labour base encompassing Maltese and migrants, the fund’s surplus was again on the increase in 2022.

How healthy is our pension system, and to what extent can it sustain improved pension income adequacy? To what extent will increased longevity, if at all, affect the adequacy-sustainability conundrum? Is the number of persons aged over Malta’s longevity duration expected to increase in the mediumto the long-term in proportion to the 18-64 age population, and what impacts will, if any, have? I will explore and discuss these and other issues in forthcoming articles.

 

DAVID SPITERI GINGELL David Spiteri Gingell holds an MPA. David was bestowed the Order of the Terra Mariana 4th Class (Estonia) in 2001. David held senior positions in government, the private sector and overseas, of which chairing the Pensions Working Group