Malta, like other advanced countries, is facing a grim demographic outlook. While life expectancy continues to rise, fertility has fallen to record lows.  As a result, almost one-third of Malta's population will be over 65 by 2070.  The old-age dependency ratio will double, meaning that it will take two workers to support each pensioner. The pension deficit is projected to reach 4.1% of GDP, but higher expenditure will not prevent pension adequacy from falling from the current 55% of pre-retirement income to just over 48%.

These pressures cannot be ignored.  Over the last decade, we have postponed the day of reckoning through the importation of more than 100,000 foreign workers and a higher - mostly female -̶   labour-market participation rate. Both have become central pillars of pension sustainability.

The 2025 "Strategic Review on the Adequacy, Sustainability, and Solidarity of Malta's Pension System" by a government working group is clear on one point. The current pension system alone is no longer sufficient to deliver a dignified retirement.  A multi-pillar system is no longer optional. It appears that the Government and the social partners are counting on Auto-Enrolment (AE) as a critical reform. 

AE enables employers to sign eligible employees into a workplace pension scheme. Contributions are deducted directly from salaries, typically supplemented by contributions from the employers and, often, tax relief from the government. While enrolment is automatic, employees always retain the legal right to opt out if they choose not to participate.

At one point, the government had introduced voluntary Personal Pensions Plan (PPP) and Voluntary Occupational Pension Schemes (VOPP).  These have been available in Malta since late 2015, complemented by a fiscal incentive (a 25% tax credit, on an annual contribution of up to €3,000).  However, as of the end of 2024, there were only about 4,667 employees participating in in Malta. While the number has grown, it still represents a low penetration rate, covering approximately 2 per cent of the 18- to 60-year-old working population.

Whether AE will do better is a mute question.  My personal opinion is that policymakers need to hedge their bets.   Because mandatory second pensions have been anathema since 2004, the recent pensions review made various recommendations about achieving better pension sustainability and adequacy.  They are all very sound, and their implementation in the next few years will undoubtedly make a difference.  However, they do not address the taboo idea.  At the cost of being labelled a heretic, I would suggest that there is some merit in reconsidering the idea as a useful supplement to the social insurance system, though with a twist. 

Recently, a number of proposals linking housing and pensions have emerged in the UK and elsewhere.  A mandatory second-tier pension fund invested exclusively in social and affordable housing could check rising rents and deliver stable retirement income. 

What is the rationale for the link?  Since 2010, real estate prices have surged across the EU, and we've seen rents follow a parallel upward trajectory.  In several EU countries, prices have more than tripled; in Malta they are twice-and-a-half higher.  The sharp rise in housing prices is hitting millions of families.

There are important drivers on both the demand and supply sides of the housing equation in Malta. On the demand side, there are such demographic changes as a growing population and increased life expectancy. While it's positive that people are living in their homes longer, it places stress on the market if we don't build units to compensate. We are also seeing an increase in single-person households as marriages break down, as well as because an increasing number of people are deciding to remain single.

There is also a mismatch between available housing and current needs.  A good number of old people are living in large houses that are under-occupied.  The incentives and support being given by the government to people living in their community is having the unintended consequence that younger people cannot access the housing they need. This is a difficult policy issue because "right-sizing" is not always a viable option for people who want to stay connected to their communities.  On the supply side, construction is constrained by land availability, zoning (ODZ land), planning constraints, and soaring costs for labour and materials.

When talking about housing affordability, it is crucial to remember that house prices and rental rates are only one part of the equation; equally relevant are housing costs relative to income levels.  In recent months, we have had media reports   ̶   then echoed and amplified in political circles   ̶   that incomes have not kept pace with rising prices.

For example, MaltaToday has reported that in 2025 an average home in Malta cost between 14-15 years of an individual's gross annual income, compared to around 7 years in the early 2010s.  On the other hand, a Central Bank of Malta note by Alexander Demarco, when he was still Deputy Governor, says that claims that Malta has a housing affordability crisis do not seem to be supported by Eurostat hard data. In fact, whereas the house prices to income ratio was 115 in 2010, it fell to 90 in 2024, whereas it was constant in the EU.

An official EU statistic tracks the proportion of households spending more than 40% of their income on housing (housing cost overburden rate).  Some 8.7% of all EU households exceed this rate and the percentage has increased since 2010.  Thank God, the rate in Malta is a mere 2.7% and has more than halved over the period. This is due to both a high rate of home ownership and the energy subsidies.

A ratio of about 30%   ̶   or one-third of disposable income   ̶   is generally considered as the threshold for affordable housing.  Low-income families are among the most affected by the housing crisis, with 31% of low-income households in the EU (Malta: 25.15) facing the highest cost overburden and severe housing deprivation.

Rising housing costs also affect young people who are caught at home, unable to transition or move from one stage of their lives into the next. Excessive delays in leaving the family home tend to increase generational inequality:  younger generations are forced to postpone important life decisions, such as starting a family or living independently.

There is also the problem of adequate living space.  This is defined as at least one room per adult couple, single adult, pair of siblings aged 12 to 17, single child over 12, or pair of children under 12, but 17% of Europeans live in overcrowded homes that do not provide this.  The percentage in Malta is much lower (4.0%) but has grown slightly since 2010.

The situation is even more acute for migrants and ethnic minorities.  A good proportion of them live in overcrowded housing and face a housing cost overburden. The lack of adequate housing also affects persons with disabilities, who experience greater difficulties in finding homes that meet their needs.

Given the catastrophic housing shortage in Europe, linking a supplementary national pension fund with the financing of social housing construction is an obvious solution. Capital would no longer flow into speculative portfolio investments or foreign markets but would instead be invested in cooperative or other non-profit housing associations. It also opens possibilities for tenant participation and innovative housing initiatives.

In the early years of such a national fund, no pension payouts would occur.   Instead, all contributions and returns on investment would be channelled into building houses. The continuous rental income from the housing stock will guarantee solid, stable, low risk returns of around 3-4 per cent. Taking the average monthly income of €2,146 in 2025, a 2 per cent contribution should   ̶   assuming that nominal wages rise at least with inflation   ̶   generate after 40 years a supplementary pension of between €390-€488 in real terms.  In addition, pension capital would create affordable housing and reduce skyrocketing rent levels. 

This approach would particularly benefit younger generations, by building a supplementary pension for their old age but also by helping to make housing more affordable.   

Social housing building costs can vary significantly.  Expenditure on projects in Siggiewi, Melleha, Msida and Kirkop has ranged between €53,000 and €125,000 per unit, while the flagship Affordable Housing Project is projected to cost €69,920 per unit.  Using an average cost of €75,880 per unit, building costs for the last known waiting list for social housing would amount to €143m.   Assuming that the Housing Authority or the Affordable Housing Foundation were to build 200 units a year for 15 years, the cost would be €227.6m in 2025 euros.

If a compulsory pension fund contribution of 0.5 per cent from all income earners were to be raised, revenues of approximately €38.6m per year could be generated. The cost of the 3,000 units mentioned above would be recovered in six years.  Obviously, a higher contribution and/or a similar contribution by employers would reduce the recovery period even lower.

A substantial expansion of social and affordable housing particularly will help, in particular, the younger generation and less affluent people who are now having to rent rather than own their homes.  Building 3,000 new housing units would have a cumulative effect on rent levels over time   ̶   not only creating affordable housing but also lowering rents overall.  This effectively makes real wages go further for tenants and reduces the burden on public budgets for housing subsidies and basic income support for poorer people.

In my purely personal opinion, now that the general election is over, the political parties and the social partners should get together to discuss the possibility of introducing a second-tier pension fund linked to housing. There are various arguments in its favour, not least the predilection of most Maltese to own their own home.  Linking a small contribution by them to the prospect of better housing affordability and a supplementary pension should appeal to them.

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.