The Malta Independent 19 April 2024, Friday
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Are state pensions on the brink of extinction?

Mark Said Thursday, 28 March 2024, 07:29 Last update: about 21 days ago

While in the EU, pension systems are a Member State competence, the right to a pension that ensures income-enabling dignity in old age is enshrined in the European Pillar of Social Rights. The current pension scheme in Malta is based on the Social Security Act, Chapter 318 of the Laws of Malta. The Act provides for two basic schemes: the Contributory Scheme and the Non-Contributory Scheme.

The Contributory Scheme is universal since it practically covers all strata of Maltese society. Within this scheme, employees, self-occupied persons and self-employed persons acquire social insurance rights through the payment of a weekly contribution as laid down by the Social Security Act.

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The ageing population will add considerable pressure on public finances in the coming decades. If the government wants to rein in state pension spending, then relying only on raising the state pension age to achieve this, rather than moving to less generous indexation, would hit those with lower life expectancy harder.

Although the state pension has increased every year since 2013, a growing majority of people think that in the next 10 years it will not keep up with inflation. Pessimism is also widespread; a third of people do not think the state pension will exist in 30 years’ time.

It is important to note that the state pension at its current level is just about enough by itself to keep most people out of income poverty (according to standard government metrics). However, there are some people — in particular, single households living in private rented accommodation — for whom the new state pension and means-tested benefits are not enough to keep them above the income poverty line.

Even for households for whom the new state pension is enough to keep them above the income poverty line, it is not enough on its own for a comfortable retirement or to provide most people with a standard of living they have been used to in working life. Instead, for most people, the state pension is a basis for building upon their savings, rather than the whole of their pension provision.

Despite these challenges, the logical rationale is that the state pension is not in danger of extinction. Indeed, its structure has much to commend it. However, improvements are needed to address the key challenges ahead. Although the state pension is higher than in the past, given its current level, many think it should continue to be accessible at a single universal state pension age rather than being made available at an earlier age at a permanently reduced amount.

To set a target level, as the government has done with the minimum wage, politicians should state what they believe to be an appropriate level for the state pension relative to average earnings as measured by median full-time earnings. They should then legislate a pathway to meeting that target with a specific timetable. This would result in an explicit commitment from the government to target a level of state pension relative to average earnings, which would then be maintained in the long run too.

In choosing the level of that state pension, the government has to consider the trade-off between a higher income for pensioners and the public finance implications that will have. Such a consideration can easily be made within the periodical reports submitted by the Minister in charge of the Department of Social Security and to be laid on the table of the House of Representatives, reviewing the workings regarding the retirement pensions together with recommendations for achieving further adequacy, sustainability and social solidarity in such a manner that a stable proportion is kept between the contribution periods and the periods during which it is expected that the pension will be paid.

Statistically, the state pension appears to be assured and sustainable for the next 40 years at least. This emerges from the Malta Fiche on Pension Projections 2019–2070.

The Maltese Government believes that the linking of the contributory period to life expectancy remains an important lynchpin in its strategy to ensure sustainable pensions.

The labour force participation rate for the 55-64 age bracket is projected to increase from 52.3 percent in 2019 to 69.5 percent in 2048, after which it will decline until 2060 before increasing again to reach 69.2 percent in 2070. Meanwhile, the employment rate for workers aged 55–64 is projected to increase by 16.0 percentage points, from 51.5 percent in 2019 to 67.5 percent in 2070.

Up to 2030, expenditure on old-age pensions is expected to remain constrained due to the higher pension age and indexation of the maximum pensionable income with the COLA. Thereafter, the increase in old-age pension expenditure will be driven by the ageing process, in reflection of the projected demographic developments, particularly those related to net migration. At the same time, the parametric changes introduced in the pension reform, the more dynamic indexation of the ceiling on pensionable income and the statutory changes to indexation for old-age pensions will also contribute to raising expenditure. On the other hand, the increase in the pension age, the increase in the contribution period for full pension eligibility, the changes to the benefit formula, and the incentives to defer retirement will contribute to a lower projected increase in pension expenditure over the next few years.

With this scenario, Social Welfare Minister Michael Falzon’s comment to the effect that people should be encouraged to invest in private pension plans, warning that a demographic shift to an ageing population could impact the public pension system, needlessly created a storm in a teacup.

 

Dr Mark Said is a lawyer

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