Some stakeholders have been lately advocating a change in policy with regards to persons who retire earlier than their statutory retirement age.  In so doing, such persons are prohibited from working until they reach their statutory retirement age.  These stakeholders claim the ‘ban’ is ‘preventing many experienced, skilled senior citizens from working on flexi-time basis’.

This proposal has been discussed and considered in the recent past by the Pensions Strategy Group. The truth is when the possibility of an early pension was introduced almost two decades ago, the concern was to not force those with physically or mentally demanding jobs to retire later than age 61 (the retirement age for males at the time). It was with this in mind that Government in 2006 was advised to allow the possibility for early retirement but curtail it by precluding employment till early retirees reach their actual pension age. That way those who cannot work past 61 are able to withdraw from the labour force while those who can and want to work, can continue working. 

In addition, to try to encourage more people to continue working beyond 61, a decade after, in 2016, we introduced very generous incentives.  These were in the form of a top-up mechanism to reward those who remain in employment and defer their pension claim.  Through such mechanism, an employee can top up his/her pension by up to 23%, depending on the number of years he/she remains in employment while the pension is deferred.  These incentives have been very successful and today the proportion who retire at 61 is less than half what it used to be before 2016. 

However according to some stakeholders the early exit policy needs to be changed as:

1.     There is a shortage of workers

2.     The current policy is promoting ageism

3.     The current pension is inadequate

While there is current excess demand for workers, it is debatable whether introducing the facility to retire at 61 and still earn a wage would lead to a higher supply of labour. Firstly, the proposed policy advocates that those receiving a pension at 61 would then opt to work part-time. Now, the current policy does not specify that employees need to stay working full-time past 61, and so the choice to work part-time past 61 already exists.  Today less than a quarter of all employees reaching 61 years of age are retiring early.  That is roughly 1,000 employees a year.  How many of these would consider remaining partly in the labour market if they receive part of the pension between 61 and their actual retirement age is anybody’s guess. 

On the other hand, if we had to implement the proposal, we could end up with many other workers who are currently not retiring early and continue working full time till their statutory retirement age and beyond, to shortsightedly start instead to take this part-exit route and work part-time.  Meaning that rather than increasing the number of full-time equivalents in our labour supply, we actually reduce them, and as I will be explaining, those opting for this route will incur reductions in their pension value.

 The argument that the current policy is promoting ageism is absolutely not true.  By adopting a carrot and stick approach towards early retirement, the current policy has ensured that many thousands of older workers have remained active in the labour market.  What is being proposed by these stakeholders threatens the gains made in recent years when the duration of working lives has risen from 33 to 38 years in just a decade, and now exceeds the EU average 

Finally, the argument that the current pension is inadequate hardly implies that we should create a pathway for people to shift to part-time work, and in so doing threaten the value of their pension. For instance, they would lose for good the opportunity of topping up their pension by as up to 23%. In plain euro terms and based on current life expectancy, someone retiring on a pension of €10,000 at age 61 would get about €280,000 in constant euro terms over his retirement

If this person instead retires at 65, will get an annual pension of €12,300 and a total sum in constant euro terms of more than €295,000. That is, the person would get 5% more than if they retired at 61. Under the proposal, the same person would get €266,500, or 10% less than if they deferred their pension to 65, or 5% less than if they retired at 61. So rather than making pensions more adequate this policy suggestion could well end up making them less adequate.

Rather than embarking on this avenue, what the Pensions Strategy Group in 2021 instead recommended is that the current top-up levels of the pension deferral mechanism be increased further, making it even more worthwhile to postpone retirement.  I am happy to report that this measure is one of many found in the Malta National Pensions Action Plan covering up to 2027 and is earmarked for implementation by then.

To conclude, removing the limit to work when availing off early retirement could reverse the positive trends and the gains achieved in these last years. We have to be very careful as we would be messing with something that is working. I believe that countries with these sort of partial pension systems - Sweden comes to mind- ended up removing them as they were sending wrong signals. I believe that the right approach is to enhance our existing incentives to postpone retirement rather than introducing measures that encourage part early exits.

At the same time, it is crucial that stakeholders come together to come up with better ways of encouraging the quarter who are retiring early to instead continue working. This could be through offering modern and more flexible forms of employment and extending family friendly measures to cover those with moderate health issues or care responsibilities, for instance.

Mark Musu’ is Permanent Secretary at the Ministry for Social Policy and Children’s Rights and Chairperson of the Pensions Strategy Group