The conversation about securing our later years is of significant importance. We must build a system that helps everyone save without harming those struggling today. Building on my earlier argument about eligibility for the Automatic Enrolment (AE) scheme, we must now tackle the central challenge: defining the financial line that determines who is mandatory opt-in.
The wisdom of the 'here and now'
My view is direct: for those on lower incomes, the immediate priority is today's financial health. It's a matter of economic survival. Current needs outweigh future mandates. It is unwise and potentially harmful to force people with limited means to divert income into a long-term retirement pot
The philosophy aligns with the idea that the emphasis for this group must be on financial education and literacy. The goal is to equip people to manage their current finances well. Saving for retirement should be a choice, a signal of stability, not a coercive obligation. They must have the freedom to choose-to opt in to supplementary plans when ready-but not be forced into AE. This ensures the savings process supports their lives rather than strains them.
A solid State safety net: The social contract
Our social contract already provides a strong base. People on lower incomes receive a State Pension equal to two-thirds (67%) of their Maximum Pensionable Income (MPI). Consider the figures: the MPI (the highest earnings figure used to calculate this two-thirds pension, which increases annually by an indexation mechanism based on a formula of 70% Wage Inflation: 30% Retail Inflation) is €28,303 for 2025. This means anyone earning at or below this level is guaranteed a pension replacing a substantial portion of pre-retirement income. The maximum two-thirds pension based on this cap is about €18,868 annually. This provides a considerable base income in retirement, mitigating the need for a mandatory supplementary plan at that level.
The two-thirds pension represents a strong replacement rate for lower earners. If you earn less than the MPI, you receive 67% of your salary. This reduces the urgency for AE among this cohort, especially compared with higher earners whose pension is capped at two-thirds of the MPI, meaning their replacement rate declines sharply as salary rises above the cap.
The question of the earnings trigger
This strong state provision brings us to the core issue: what should the Earnings Threshold be for AE? We need a number that prevents AE from becoming a burden, triggering only when earnings clearly indicate the capacity to save without hardship. AE must not penalise those managing tight budgets. Possible income triggers include:
o Below the MPI (€28,303): As noted, persons earning above this cap already see a fall in pension adequacy. Mandating savings for everyone above the cap is logical-but where is the precise line below it?
o The Maximum Two-Thirds Pension (€18,868): This figure represents the substantial floor provided by the state (which increases annually by the indexation mechanism as stated). Should AE apply only to those earning well above this base?
o The Average Basic Wage: a benchmark linked to the typical cost of living.
o The National Minimum Wage plus a percentage (e.g., 125%): tying the trigger directly to low-income definitions offers protection for those just above the minimum.
The hidden income problem: basic gross pay vs total earnings
Choosing the right number is complicated by a key design feature: contributions are calculated on basic gross pay, not Total Earnings. We know Total Earnings can be higher than basic gross pay. Compensation often includes allowances, bonuses, overtime pay, and more. For many low-income workers, these add-ons are vital to stability.
This creates a major problem for fair eligibility. Many workers earn far more than their basic gross pay through overtime, bonuses, and allowances. Using basic pay alone to decide AE eligibility is misleading. It can exclude workers who should be enrolled because their full income is ignored.
Pensions are calculated only on contributions from basic pay. Even if a person earns more overall, their pension reflects only that smaller base. The result is a sharp drop in income at retirement. People who live on higher total earnings face lower pensions and reduced adequacy. The gap between real working income and pension income widens most for low earners and those just below the AE thresholds.
Part II of this series will explore these choices in depth - how Malta can design an AE system that is fair, sustainable, and grounded in real earnings.