Friday before last I was invited to air Alternattiva Demokratika’s views on the proposed pension reform on Malta’s most popular TV show. The reason that the Greens were invited was not only because of its status as a political party, but because we have acquired legitimacy on this issue due to our unique participation in the debate.
We are unique because AD is the only political party that contributed to the White Paper published by the Pensions Working Group (superb work by David Spiteri Gingell and his team) way back in November 2004. This may come as a surprise, but both PN and MLP refrained from making their comments on this White Paper. Why? Because these parties have effectively neutralised each other on such crucial matters, both scared to death of having any of their opinions used against them in the evening editions of surreal news on NET and Super 1.
It is sheer cheek of the PN to hammer the MLP for not contributing to the debate on pensions, when they themselves did not. Waiting for the outcome of a commission is not a contribution. The Greens contributed actively and sincerely. We forwarded our proposals to the Pensions’ Working Group in April 2005. As always, on matters of national importance we show courage and spill the beans – come what may. Let me run you through some of our key proposals.
The first part of our report dealt with what we termed “Mitigating Factors”. These factors are intended to relieve, to some extent, the financial blow to the general population that will inevitably result from the reform to be finalised in June. We discussed, for example, the difficulty that many sectors of society will face to contribute substantially to a private pension due to the heavy burden many of them carry to repay exorbitant loans on property. We proposed that a reform in the rent laws, which includes both incentives and disincentives for those owning vacant properties to put these on the market, which would have a cushioning effect on the explosion of property prices.
We also suggested that the creation of a modern and efficient public transport system would give families a serious alternative to owning two or more cars. Think for a moment. The second automobile owned by each family sets that family back some Lm6 a day – equivalent to almost Lm2,200 per annum. A clean, efficient and punctual public bus transport (unlike the present set-up) costs 80 cents per day, or just Lm200 per annum. The saving of some Lm2,000 per annum can be channelled, among other things, into a private pension plans. Over 40 years, that would translate into a pension fund of some Lm120,000. Need I say more? What is Jesmond Mugliett waiting for?
Furthermore, we discussed the importance of government tightening up its anti-fraud measures so that “benefit cheats” are eliminated; we extended our support to government to work towards a gradual decrease in public service/sector employment so that funds released can be channelled into welfare programmes that, due to a shrinking and ageing population, will become more expensive.
In the second half of our report we dealt with the mainstream issues on pension reform, like the raising of the retirement age and the establishment of private pensions, now strangely referred to as “second pillar contributions”. While we suggested that the retirement age is gradually raised to 65, we made exceptions. We recommended that people should still retain the right to retire earlier (63) even if this translates into a reduction in pension income between the age of 63 and 65. We said that for certain categories of workers, particularly those where heavy manual labour is involved, this right should be available at age 60. Fortunately, the government seems to be in agreement with our proposal that people should have the right to retire earlier. However, Premier Gonzi announced unequivocally that no exceptional concessions would be made to those carrying out burdensome manual work. This shows crass insensitivity to the plight of such people. We intend to continue arguing this matter in the coming months.
We also supported the mandatory introduction of private pensions. However, we cautioned that it would be impossible to impose these on low and medium-to-low income earners. Premier Gonzi shied away from introducing mandatory pensions as yet, citing a weak economy as the reason. However he bluntly stated that when mandatory pensions are introduced (in two years’ time perhaps?) they would be imposed on “kulhadd” (everybody). This is socially insensitive and fundamentally unworkable. In the UK Tony Blair attempted something similar in 2001. He introduced what he called Stakeholder Pensions. This attempt to have those on low and medium-to-low income to save money, irrespective of amount saved (in many cases as low as £5 a month), proved a complete failure. Not only did it cause hardship to the poor, the processing fees alone cost, in many cases, more than the amount saved. May I suggest that we learn from Blair’s failure?
The Greens will continue arguing that certain people of humble means and modest earnings will not be able to save – for God's sake, many of them can’t even pay their existing bills! However we do recognise that alternative solutions must be studied so that adequate supplementary income is made available to these people during their retirement. The Greens are proposing that the government establishes a supplementary fund to provide a safeguard for those at risk of poverty during retirement. The question is where to get the money. Here is our solution. On 10 April 2005, Parliamentary Secretary Tonio Fenech declared that tax compliance in Malta is about 65 per cent. This translates into tax evasion of more that Lm100 million per annum. We believe the government can capitalise on this situation.
The Greens believe there is scope to lower the top rate of income tax from 35 per cent to 30 per cent and step up, very significantly, tax compliance. While it is true that, prima facie, government income from those who submit honest declaration will decrease, due to a lower top rate, the added tax compliance on those who blatantly cheat will result in an overall net increase. My calculations indicate that if the top tax rate for individuals and small business decreases from 35 per cent to 30 per cent, government income tax revenue will decrease by Lm15 to Lm20 million. However if, as a result of stricter enforcement, tax compliance increases from 65 per cent to 80 per cent, income will increase by Lm40 to Lm45 million per annum.
Furthermore, another Lm5 to Lm8 million can be generated by increasing the tax rate from 35 per cent to 40 per cent for banks, financial institutions and companies not operating in a highly competitive market, such as Maltacom and Vodafone. Overall, we estimate that government can rake in net additional revenue of Lm30 to Lm40 million per annum. On the back of such a proposal the Greens are suggesting that government implements such measures and siphons off this additional tax annual revenue over the next 20 years (when the pensions crisis will really hit home) into a national pensions fund earmarked to save for those who simply can’t. We estimate that, in such manner, over the next 20 years a fund of some almost Lm1 billion can be built.
In this manner, while we can give the middle class a well deserved tax break, we can provide a buffer to protect the needy when they need it most; during retirement. Those who are living off tax evasion will have to foot the bill – tough!
Edward P. Fenech is spokesperson for Finance, the Economy and Tourism of Alternattiva Demokratika – The Green Party