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In 2026: work longer or pay more tax

The Central Bank warns that the beneficial economic impact of the pension reform will fizzle out in 10 years’ time, and that the government may have no choice but to cut its spending or raise taxes

james
James Debono
23 January 2017, 7:15am
By 2026 now, the potential working age population will be 24,171 more than if the pension age had remained at 61
By 2026 now, the potential working age population will be 24,171 more than if the pension age had remained at 61
The Central Bank of Malta has warned in its quarterly review that without further measures encouraging people to work longer over and above 65 years of age, the government may have no option but to decrease spending or raise taxes to finance its sizeable pension bill within just 10 years.

After remaining unchanged for decades, Malta’s retirement age started to rise again in 2012 as a result of a reform approved by the first Gonzi administration in 2006.

The gradual process will see everyone’s retirement age rise to 65 by 2026. 

But the Central Bank warns that the beneficial economic impact of the pension reform will fizzle out in 10 years’ time, and that the government may have no choice but to cut its spending or raise taxes to prevent a contraction of Malta’s gross domestic product due to the rising pension bill.

Such was the increase in retirement age crucial for Malta, that had retirement age stayed at 61 and 60 years for men and women respectively, the number of working-age people (15-61) would have been 8% lower in 2022. And that means, less tax and social security contributions to finance pensions.

By 2026 now, the potential working age population will be 24,171 more than if the pension age had remained at 61.

Lower spending on pensions and higher revenue from taxes on income has already improved the deficit-to-GDP ratio by 0.2 percentage points in 2013 and 2014. That means that Malta’s overspending is a smaller portion of total economic growth than it would have been without increased tax revenue.

But in 2026, the impact of pensions will see this same ratio rise to 1 percentage point. So without a further increase in retirement age – which means having more people working to sustain tax revenue – Malta’s public debt could increase by 7.7% of GDP in 2026.

The Central Bank report warns that if the retirement age does not increase, the economic and fiscal benefits of the gradual increase in pension age to 65 would be substantially lower. “Lengthening of working lives” remains of crucial importance for the government.

james
James Debono is MaltaToday's chief reporter on environment, planning and land use issues, ...