In Malta, as in other advanced countries, a combination of rising life expectancy and falling birth rates is putting pressure on pension systems. By 2050, the number of people aged 65 years and over in Malta is set to rise to some 33 percent   ̶   more than double the figure seen in 2011.

What is driving this development? Basically, there are two factors at work: much-improved health care that is enabling people to live longer and the greater education and autonomy enjoyed by women.   The consequences of these positive trends are, however, that economies and societies are being faced by higher old-age dependency. In 2023 the dependency ratio reached 28.0, which means that there were just 28 persons aged 65 years or more for every 100 working-age adults (20-64).  By 2050, the ratio is projected to grow to 37.

The higher the ratio of pensioners to younger people, the greater is the burden placed on government budgets, as declining revenue from taxes and increasing state spending on healthcare and pensions squeeze the system and make it unsustainable. The total burden of ageing is projected to increase by 8.7 p.p. to 25.6 percent in Malta by 2070, compared to a rise of 1.2 p.p. to 26.5 percent in the EU.

How did this dangerous time-bomb build up?  Demographic changes do not occur overnight but are typically evolutionary, compared with such other huge influences on social and economic well-being as mass immigration movements, wars, and technological change.

One cannot say that the situation we are facing emerged suddenly.  In fact, these demographic trends were predicted several decades ago.  Unfortunately, a series of crises, as well as myopic behaviour by governments in most countries, have meant that most countries missed a fairly wide window of opportunity to act in time.  Crucially, governments and society have failed to cultivate behaviours that could have modified future demographics.

As it is, several adverse trends are panning out synchronously.   One of them is the impact of an ageing population on productivity.  Thus, if an economy has fewer working-age people, businesses may struggle to fill positions. Sounds familiar?  In this case, the shortage of workers stifles the output of goods and services, harming international competitiveness. 

Until recently, we in Malta have countered this demographic shift and prevented it from being hugely damaging for productivity.  Especially after 2013, as the number of older people in the workforce grew, the government counterbalanced the rising old-age dependency ratio by incentivising thousands of people   ̶   including women   ̶   to return to the labour force, stimulating longer working lives and, recently, even encouraging people to retire later.

Moreover, thousands of foreign workers have been brought in to plug the shortfall. In the short term, this worked to a T, but is it a sustainable solution?  The policy created its own problems, mainly because planning was poor.  The physical infrastructure was not sufficiently robust, accommodation problems emerged, wild west labour practices and working conditions abuses multiplied, and nationalistic and jingoistic issues raised their head.

One longer-term solution without the negative repercussions I have mentioned would have been to raise the pension age even further, like other countries have been doing. But even this is not an easy political route; vide the recent hullabaloo about raising the number of years of social security contributions required to qualify for a pension by one year for persons born after 1976.   The government had to cope with a lot of flak, ironically from the Opposition which had introduced this mechanism when in government in 2006.

There is another potential fall-out from an ageing workforce: it could also depress investment and have a negative impact on capital formation.    Savings and capital supply may decline if the proportion of older citizens, who tend to divest, rises while that of the working age population, who accumulate savings, shrinks.  However, this is not certain, since some economists argue that there could be a rise in precautionary savings to prepare for longer periods of life beyond retirement, capital deepening due to lower labour supply, and a higher demand for safe assets due to older people being more risk-averse.

In spite of all the problems, the situation is not yet desperate.  There are a number of avenues still available to improve our demographic preparedness.  These range from enhancing reproductive health, through giving people the human and physical capital they need to be more productive, ensuring labour and capital markets that ameliorate productive potential, implementing policies that limit damage to the environment, to promoting healthy ageing.

There is a sore need for human capital investment initiatives that will sustain per capita economic growth despite declines in the share of the working-age population. Jobsplus and the Education Ministry need to reinforce training and skills programmes aimed at increasing the productivity not only of current members of the workforce, but also of underrepresented groups, such as mothers and older people.  Equally crucial are investments in primary and secondary education that focus on critical skills.  Unfortunately, we prefer to spend millions on shiny new schools when what is needed is a revolution in educatiional outcomes.   

Other solutions include addressing the problem of low fertility through policies and behavioural changes that reduce the unmet needs of young families and attenuate the social and economic burdens that weigh on them.  There is evidence that 'pro-family' policies, such as more generous parental leave and greater flexibility in working hours, are associated with increased fertility.

Increasing the fertility rate from its current nadir of 1.06 live births per woman (EU: 1.38)   ̶   compared to the 2.1 births needed to keep the population size constant without immigration   ̶   will be a challenge if policymakers do not realise that they need to address all obstacles.   For example, there is growing evidence globally that male sperm counts have declined by about 52 percent over five decades.

Researchers are increasingly blaming environmental factors, including pollutants and 'forever chemicals' (PFAS), which are toxic and do not break down in our bodies or the environment.  Yet, there is resistance to the idea that the government may need to reduce the population's exposure to air pollution and forever chemicals.  Protecting the long-term reproductive health of the population is ultimately a way of tackling population decline.

If left unaddressed, population ageing will pose a burden on Malta's public finances, given the relatively strong role of publicly financed pension and health care systems. Debt sustainability could be challenged by excessive age-related public spending.

Frans Camilleri is an economist. He studied at Oxford and University of East Anglia, is a former corporate head at Air Malta, and has served on various public and private boards.