Credit ratings agency Fitch has released a report saying that an ageing population is set to have a severe impact on the Maltese economy unless the necessary reforms take place. If reforms are not implemented, Fitch said it expects to downgrade its rating by at least four notches by 2050

According to the report, titled “Ageing costs: the second fiscal crisis,” Japan, Ireland and Cyprus face the most urgent challenge, whereas Luxembourg, Belgium, Malta and Slovenia face the most severe impact without reform by 2050.

The report focuses on countries with advanced economies, in which the elderly are expected to make up a rapidly rising proportion of the population over the next few decades.

In its report, Fitch said economies’ adjustment to the effect of the 2008-2009 global financial crisis remains the most pressing risk, but the pressures of ageing population could take precedence as the major threat.

Fitch said that surveys show that the population of Malta, and other countries, is set to grow rapidly over the next few years. As a result, more money out of public coffers will be spent on pensions and healthcare – with 4.1% of GDP per annum across the eurozone expected by 2050.

Such an increase, Fitch warns, would be comparable to that experienced in the wake of the global financial crisis in 2008/2009. On the other hand, it said, the effect would not be as immediate as that of the financial crisis and would be felt over the longer term.

Such an expenditure increase would greatly push up public debt ratios: in Malta, an ageing population would contribute to a government debt increase amounting to 68.2% of the GDP, which is nearly equivalent to present levels of public debt – that means double. That the estimated increase in the euro area is even higher – 111.4% of GDP if nothing is done.

Malta’s elderly dependency ratio – the number of over-65s compared to the number of people aged 15-64 – stood at 19.8% in 2010. It is expected to rise to 35.5% by 2025, and to 49.3% by 2050. The figures come as a result of better healthcare and a better standard of living than in the past.

As far as reforms are concerned, Fitch remarked that the financial crisis did spur policy reforms in several European countries, pointing out that the long-term impact of ageing has effectively been neutralised in Portugal, Italy and Greece.

While the agency noted that it is not currently downgrading countries’ ratings on the basis of future ageing costs, since few countries face an imminent problem, it does expect to do so over the next decade “for countries facing the most severe and/or urgent ageing pressures in the absence of reforms.” Since reforms are typically phased in over several years to lessen the shock to individuals close to retirement, Fitch also pointed out that governments will find it harder to rescind commitments on ageing-related spending over the next 5-10 years.

Malta has already had its fair share of issues related to the issue of pensions and retirement age. But it is clear that something more will have to be done to address the situation. The system is what it is, but somewhere along the line, there is going to have to be further emphasis on private pension funds. The problem is not going to go away, and it is people who are in the 20-30 year bracket which will have to pay for it. We have long heard that the pension system is unsustainable, but we must also realise that we have to talk about medical care and more. The problem is here and here to stay, unless something is done about it quick, smart.