The European Commission has just reiterated a number of recommendations on which it considers Malta should be taking action if it is to weather the financial storms ahead to achieve a balanced budget in the medium and long term, as it is obliged to do under the EU Fiscal Compact. The commission’s recommendations will formally be approved by EU leaders at the summit at the end of the month.

Among the six recommendations which it has put forward are two that particularly caught the eye. The first is the need to “take action, without further delay, to ensure the long-term sustainability of the pension system, comprising of: A significant acceleration of the progressive increase in the retirement age compared to current legislation; a clear link between the statutory retirement age and life expectancy; and measures to encourage private pensions savings”.

None of this will come as news to either the government or the opposition. The unsustainability of the current pension arrangements have been well known for some time, going back some twenty years.

The average age of the Maltese population has been rising steadily due to a decline in those aged 50 years and under and increases in those aged 50 to 64, 65 to 79 and 80 years and above. The largest increase has occurred in the 50 to 64 age bracket, while the most significant decrease has been in the 0 to 14 years cohort as a result of Malta’s declining fertility rate. Within the next few years, 18% of the population will be over 65 and this will increase to almost 25% by 2025.

What this means in practice is that a smaller productive work-force will have to provide for the pensions of an increasingly larger non-productive, retired section of the population. Advances in social conditions and health-care will increase life-expectancy and will therefore add to the number of years when a pension will be payable.

A report by The Today Public Policy Institute in 2009 entitled “ The Sustainability of Malta’s Social Security System: A Glimpse at Malta’s Welfare State and Suggestions for a Radical Change of Policy” concluded that by 2015, expenditure on the two-thirds pension will be equivalent to 81% of the funds generated by Social Security contributions, this itself being 54% of the total funds available. This upward trend caused essentially by the incontrovertible demographic challenges of an ageing population will make our pension system both unaffordable and economically unsustainable.

Politicians of both parties should face up to the reality of the pensions time-bomb honestly and in a bi-partisan manner, for whichever of them gets into power when the next election takes place will have to take action to deal with the issue. For starters, the introduction of a mandatory second pillar to the state two-thirds pension should be implemented without further delay. But beyond this, action to delay the age at which pensions become payable also needs to be taken sooner rather than later as the government-appointed pensions working group has already warned.

The statement by the Leader of the Opposition that, rather than raising the retirement age as the EU requested, a Labour government would focus on economic growth to solve the problem is simply wrong-headed, dishonest and misleading. The economic maths don‘t add up. While, of course, Malta should strive for economic growth to pay for its generous welfare state, this will not on its own suffice to cover the demographic gap. The example being set in France, where newly-elected President Hollande is reversing the modest increase in retirement age from 60 to 62 introduced by President Sarkozy – and which presumably inspired Joseph Muscat’s statement - is the wrong model to emulate. It will inevitably lead to swingeing increases in French tax rates to balance the fiscal books. This is not an option available to Malta, which already carries a high tax burden and whose future competitiveness is vital to its economic survival. The imperative now must be to make pensions more affordable for the country by dealing with the structural weakness that lies at the heart of the present system and progressively to raise the age at which one becomes eligible for it.

The second EU recommendation was a portmanteau statement also linked in its effects to the pensions time-bomb for it directly affected Malta’s productivity. This was the pressure on Malta to “take steps to reduce the high rate of early school-leaving. Pursue policy efforts in the education system to match the skills required by the labour market. Enhance the provision and affordability of more child-care and out-of-school centres, with the aim of reducing the gender employment gap, and at the same time, reducing the effects of parenthood on female employment”.

Living standards in Malta can only be raised in a sustainable manner, through greater mobilisation of human resources and higher productivity levels. The part played by women in the work-force is a crucial element of this. The female participation rate in the labour market is low – about 40% compared with an EU average of just under 60%. Yet the quality of Maltese women already in careers in the professions and business and in industry is outstanding – superior in many cases to that of men. Every effort therefore needs to be made to increase female participation in the work-place.

This will entail a far more wide-ranging effort to encourage women to take up employment and, more importantly, to stay in the work-force after marriage. Further concerted efforts should be made to develop family-friendly measures, such as flexible working hours, remote working and tele-working. While a good start in this direction has been made in the government sector, more still needs to be done. The real challenge is to find imaginative ways of creating incentives to spread such measures more widely throughout the private sector.

Child-care services in Malta, though improving, are still the lowest in the EU. While Malta is blessed in still having a culture where grand-parents are ready and able to play a part, a programme to expand the coverage of government-run child-care centres should be undertaken. At present, this only accounts for children of two parents working full time and has a very low coverage – about 4% benefit. Ambitious plans not only to expand this scheme considerably, but also to include the children of single parents, should be undertaken. Moreover, the hours when child-care centres are in operation, as well as state school hours, need to be better aligned with the needs of working parents.

The EU Commission’s message is clear. Malta’s future fiscal sustainability can only be achieved through expenditure restraint and a re-ordering of spending priorities. The projected reduction in Malta’s working-age population will reduce growth and tax revenues at the same time as the fiscal burden of a larger population of elderly people is increasing. The corrections needed to bridge the forecast gaps caused by the pensions time-bomb imply a vital need for a critical reassessment of how they are funded and the age at which they are provided, and an imaginative effort by all available means to expand our work-force through the greater participation of women.

Martin Scicluna is the Director General of Malta’s only independent think-tank, the Today Public Policy Institute. He writes here in his personal capacity