Migrant workers eased pressure on pensions. Will Malta sustain this economic growth?

Official statistics published by MaltaToday last week showed that 76,866 foreign workers and self-employed persons were paying a staggering €168 million in social security contributions in 2019, which is the equivalent of 23% of all social security contributions paid. 

But whether this will make the Maltese pension system more sustainable, depends a lot on whether current growth levels are maintained.

“If in a post-COVID-19 scenario our economy will reach growth levels as experienced prior to 2020, then the presence of foreign workers and increasingly third-country nationals would as a minimum remain around 70,000,” said the economist Philip Von Brockdorff on a scenario in which NI contributions would remain at current levels.

And that means it would help support Malta’s pay-as-you-go pension system. “With an ageing residential population as well as with most third-country nationals not eligible for a pension anyway, foreign workers’ contribution to national insurance will continue to ease the financial pressures caused by an ageing population, and possibly – though unlikely given the still increasing life expectancy – avert further increases in the retirement age.”

But Von Brockdorff also points out that the presence of foreign workers and increasingly third-country workers is demand-driven. “Strictly speaking it is unrelated to the fact that foreign workers contribute around 23% of NI contributions”.

He points out that if the demand for foreign workers wasn’t there, the argument whether the share of NI contributions helps to make social security pensions more sustainable would not arise.

“What we should be asking is whether the presence of around 70,000 foreign workers is temporary or permanent. The answer lies in our economy’s potential output or simply put our capacity to grow.”

Prof. Joe Falzon, lecturer at the Faculty of Economics, Management & Accountancy at the University of Malta, noted that Malta’s large economic growth in the last seven years had eased demographic pressures from an ageing Maltese society and its lower birth rate.

Falzon compares pension schemes to pyramid schemes, as their sustainability rests on “a large group of current workers paying for the pension of the current few retired workers”.

This means that the weight of many older, retired workers will have to be sustained by less and less workers in current employment. This means that either pensions be relatively reduced over time, or the contributions by the fewer workers to be relatively increased over time... or workers retire later in life.

But economic growth and the increase in foreign workers coming to Malta had reduced the fiscal pressure on the pension contributions. “Faster economic growth and a larger number of total workers employed in the economy naturally boosted the overall national insurance contributions received by the government,” Falzon says, allowing the government to increase the level of pensions for several years in a row.

However Falzon says the maximum level of the contributory pension in Malta is currently fixed at less than €1,200 per month, including statutory bonuses.

Although the pension capping on which the maximum pension is set to increase, depending on one’s year of birth, for those earning in excess of this capping this means that when they retire in the future, they will have to drastically cut their standard of living to live on lower income in retirement, or will have to keep working to sustain their lifestyle.

“This is why the government’s fiscal incentive for workers to start their private third pillar investment pension and the top-up incentive for those who defer claiming their pension, are steps in the right direction, and should be adopted by all workers to sustain a better standard of living upon retirement.

The rejuvenation of the working class

The rejuvenation of the Maltese workforce was confirmed in a Central Bank of Malta report penned by Economist Aaron G. Grech, which found that while the proportion of over-50s in the EU’s labour force had risen from 29% to 32% between 2014 and 2018, in Malta it had fallen from 24% to 23%.

Malta and Luxembourg were the only countries in the EU that saw a decline of the proportion of over-50s, as against countries like Italy and Greece where during the same period the proportion of over-50s in the labour force rose by 5 percentage points.

But the report had found that this overall rejuvenation in the Maltese labour market has masked ageing in various sectors of the economy, and warns that Malta’s supply of “manual workers” could further decline “in the absence of higher migration or policies that counter the effects of ageing”.

In fact, the share of older workers in public administration, in wholesale and retail, and in administrative and support services, has grown by four percentage points over the past decade. The largest increase in age was observed in the agricultural and fisheries workforce, while the complement of manufacturing, construction and financial services has also aged.

The risks of dependency

While most economists concur that the influx of foreign labour has eased pressures on the sustainability of the pension system, others like former Labour leader Alfred Sant had expressed concern on the long-term consequences of such an approach.

When quizzed on the subject in 2018, he noted if foreign workers do not stay on and access their pension entitlements, “in theory this should lead to less pension payment pressures on the financial system over the medium to long term” but then risks Malta becoming too dependent on foreign labour.

“Does it mean that this country will end up like an Arab Gulf state, which depends on transitory human resources to fuel economic surges whose final outcome is unknown?” he asked, warning against the temptation for Malta to achieve “a ‘rentier’ way of life, that the presence of foreign workers encourages further.”

For Sant, Malta’s best guarantee for the future is to achieve excellence in educational achievements and technical skills for the whole of Maltese society.