Skewed assumption: Malta pension spend not as large due to transient foreign workers

Foreigners make up almost a quarter of the population but their impact on the country’s pension spending in the future has been overstated, a new study shows.

Malta’s pension costs may be lower than projected by the European Commission since not all migrant workers remain long-enough to qualify for a pension, the study prepared by Aaron G. Grech, chief officer of the Economics Division at the Central Bank of Malta, suggests.

“Relying on existing population projections, with their strong assumptions about migrants settling permanently in Malta, may make the country’s long-term fiscal sustainability appear much worse than it could effectively be,” Grech says.

The study was published in the Central Bank of Malta’s Quarterly Review released last week.

Grech’s research suggests that the proportion of foreigners in Malta who may acquire vested pension rights may be at most 20% of the initial inflow. He says that over 15,500 of the current foreign workforce could eventually have some entitlement to a Maltese pension, a far cry from the 42,000 projected by the EU.

In most cases, the pension is highly likely to be pro rata since most would be unable to reach the required number of contributions for a full pension.

“Unless a third country national has started to contribute in Malta as from the age of 24, and continues doing so until age 65, such person would not qualify for a full pension,” Grech says. “Of all the migrants that have come to Malta in the last decade, only a quarter would have a full contributory period if they were to remain working in Malta till retirement age.”

The research challenges the assumptions made by the European Commission, which identifies Malta as one of the top five EU countries in terms of projected rise in pension spending.

Malta’s projected increase is nearly four times the EU average. The EU’s projection is a direct reflection of the population projections, which see Malta’s old age dependency ratio take a turn for the worse after 2040, due to assumed ageing of migrant workers in Malta.

However, Grech notes that a 2019 study by the CBM had found that around a quarter of foreigners exit the Maltese labour market within their first year in the country while around half exit between one and two years later.

Administrative data from the Social Security Department further indicates that at present the number of foreign citizens who have paid enough contributions to qualify for at least a pro rata minimum pension in Malta amounts to just over 3,500 individuals. This means that less than one in twenty of current foreign workers have a direct entitlement to a pension from Malta.

“If one assumes two thirds of those migrants which Eurostat assumes will be staying until retirement do so, spending would rise by five points compared to 2019. If one were to calibrate this scenario such that by 2060 there are 15,500 migrants who are retired in Malta, growth in spending would be slightly less than three points,” Grech says.

He adds that this recalibration would bring Malta’s results nearly in line with those of the rest of the euro area, instead of being four times as high.

Grech says that the extent to which ageing expenditure forecasts are affected by assumptions on migration warrants a degree of caution.

“For policy formulation purposes, Maltese policymakers need to monitor the length of stay of migrants and take this into consideration when making long-term fiscal plans,” he argues, warning that unrealistic assumptions could impact the process of pension reform.

Figures from the 2021 Census released last week show that foreigners make up 22.2% of Malta’s population. There are 115,449 foreigners living and working in Malta.

The numbers show how the foreign population increased more than fivefold in just a decade. The 2011 Census had recorded a foreign resident population of 20,289, equivalent to 5% of the population.

Qualifying for Malta’s two-thirds pension

A worker must have paid contributions for a minimum period ranging from 10 to 12 years depending on one’s date of birth. To receive a full pension, the required contributory history is between 35 to 41 years.

Workers from EU countries and from nations with which Malta has signed special agreements may be able to utilise contributory periods in Malta to qualify for a pension when they retire elsewhere but Malta’s share would be pro rata at most.