Should we work more? Pensions, an old-age problem

Better, and subsidised healthcare has helped the Maltese live longer. But as Brussels tells Malta to speed up ways of sustaining the cost of an ageing generation, should we also be made to work until the age of 70?

Is it acceptable to have people working beyond the age of 65, and retiring at 70 – and does it risk changing the way we appraise our quality of life?
Is it acceptable to have people working beyond the age of 65, and retiring at 70 – and does it risk changing the way we appraise our quality of life?

It's quite likely that more photo opportunities for the parliamentary secretary for the elderly, and the President's spouse are in store by 2025, when they will be presenting their token gifts to more centenarians than ever before.

There are some 1,600 people aged 90 years and over in Malta (60% are women) but by 2025 these members of the community, and other pensioners aged 75 and over are going to form well over a quarter of the Maltese population, as birth rates decline and life expectancy at births reaches 78.3 and 82.6 for men and women respectively in 2030, and then goes up again to 80.7 and 84.1 in 2050.

This is indeed good news, were it not for the staggering financial implications, that so many killer diseases that ravaged the large families of the pre-war and post-war periods have now been almost obliterated. Even the typical conditions that afflict middle age, such as heart disease, are no longer treated as fatalistic by-products of living 'the good life' - only this week, the St James Group initiated the Maltese heart attack prevention campaign, a sign of the growing awareness of maintaining a lifestyle that prolongs longevity and reduced dependence on acute healthcare.

As Europe grapples with the sovereign debt crisis of the fiscally disemboweled eurozone members like Greece, pensions and savings are becoming even more crucial for national economies.

But this time, solutions to ensure there is enough money in the kitty to fund elderly dependants have rekindled an old ideological divide into a 21st version of 'austerity-ites' versus 'growthists' - broadly speaking, a loose grouping of thinkers inclined towards less government spending and greater productivity; as against those who believe that taxation and capital investments should generate more jobs. It's not as clear-cut or neat as this, but since the election of 'growthist' Francois Hollande to the French presidency, the dynamics with German chancellor Angela Merkel have just got that more interesting.

Population trends

See infograph in its original print version.

A fiscal problem

As things stand, the gap between pension contributions and benefits being paid out by the Maltese are of some concern, as illustrated by Central Bank governor Josef Bonnici in a speech he made in 2011.

In 2012, the government will pay out €377 million in retirement pensions and €114 million in widows pensions. Additionally, over €191 million is earmarked as the State grant equal to half the total amount contributed by employees and employers from the private and public sector as national. It's over and above the projected deficit for the year.

But why is this a cause for worry?

"The size of these outlays should be of concern for two reasons. The shortfall is certainly not arising from pension benefits that are too generous. Secondly, the amount of the welfare gap [what is paid out as against what is actually contributed to government coffers] is going to rise rapidly as people live longer and the population ages," Bonnici says, in an apt reference to Malta's successful, yet expensive, free healthcare regime.

The urgency of reforming pensions and the way they are financed has only increased since some far-reaching changes were introduced over the past five years. These included the increase in retirement age to 65, as well as raising contributory pensions by ten years to 40 and calculate pensions on the best 10 years, rather than the best three years out of the 10 prior to retirement.

The changes to the pay-as-you-go (PAYG) national insurance meant that the average replacement rate - the percentage of a worker's pre-retirement income that gets paid out as a pension - climbs to 45% in 2060, as against the 18% it would have otherwise been if the reforms were not adopted.

In the words of pensions working group chairman David Spiteri Gingell, such reforms are already rendering positive results. Apart from stopping the degeneration in pension payouts, there has been an increase in the number of people working beyond the official retirement age, an increase in the active participation rate of women and a decrease in claims for the invalidity pension.

"They were no small reforms; reforms that were carried out in a relatively short time from when the White Paper was launched in November 2004 and enacted in the House of Representatives in December 2006."

But the Working Group has also warned that as Malta's population gets older (see diagram) the key in ensuring a 45% replacement rate, is encouraging more people to go out to work.

An ideological divide

Politically, the European Commission's recommendations that Malta raises its retirement age to counter the increase in spending in pensions and other healthcare costs is also reflected in this ideological divide.

Brussels believes in raising the pensionable able, if it allows people to work longer if they are healthy enough. It admits that health is a crucial factor in this proposal: having someone work up to 70 depends on their ability and willingness to continue working, which is why the Commission is pushing for investment in health promotion and cost-effective health systems. Critics caricature this work-till-you-drop proposal as a somewhat Orwellian future.

"Staying active during some of the extra life years gained does not mean older people are being deprived of their well-deserved retirement for the benefit of the young," the Commission argues in its latest pensions White Paper. "The increases availability of experienced older workers will enhance Europe's growth potential and create more opportunities and better living conditions for the young and old."

Labour leader Joseph Muscat, who has committed his party to oppose any increase in the age of retirement, claimed this week that the Nationalist government if re-elected will bow to Brussels' demands. On his part, the minister for justice and the family Chris Said has denied increasing retirement age is on the cards.

Brussels has noted Malta's low employment rate of older workers, especially women, and urged Malta to take action without further delay to increase the retirement age, increase the participation of older workers in the labour force, and discourage the use of early retirement schemes, as well as encouraging private pension savings.

The backdrop to this is Malta's high degree of early school-leavers when compared to the number of university graduates and the low proportion of women in the labour force. In 2010 the employment rate among females aged 15-24 stood at 42%, while those aged 25-34 were 65% in employment. On average, women work six hours less than men in a week. Taken as a whole, the inactivity rate of women aged 15-64 has decreased gradually, from 63% in 2003 to 58% in 2010.

But just over half the female youth demographic and over 80% of women aged 55-64 don't work.

As things stand, Malta employs a first-pillar 'pay as you go' pension that guarantees a minimum standard of living. A mandatory, second pillar would make it obligatory for savers to have a private, occupational pension scheme that supplements the government pension; a voluntary, third pillar would be an additional contribution to complement pension income.

But what about the 'fourth pillar' - where good health expectancy should be accompanied by an extension to working life?

The Chamber of Commerce, which has been at the frontline of calls for pension reform, is a supporter of private pensions, hoping a third pillar would be successful enough to postpone the need for a compulsory second-pillar measure "which could have serious social and economic implications".

"Businesses in Malta managed to keep unemployment at bay with a conscious effort to keep jobs and employment levels up," Chamber president Tancred Tabone told MaltaToday. "A mandatory second-pillar pension could see businesses having to pay out higher salaries for employees who would be obliged to save up for their pension. Anything that can erode competiveness now should be avoided."

The Chamber knows that radical measures ensuring sustainability of pensions include raising the retirement age or even a selective immigration policy for high-value added positions. But Tabone prefers a gradualist approach that puts major emphasis on the third pillar pension.

"We need to relieve the current system by allowing people to go for a voluntary, third-pillar pension that supplements the government pension. That, and encouraging more people to get in the labour market are the first steps. We should only look at the second-pillar pensions after we take these steps."

Following denials and rebuttals about raising the retirement age this week, Tabone says that politicians should be wary of "selling out our wellbeing to votes". But some unions have already voiced their clear opposition to any proposal to raise retirement age.

The most vocal, echoing Labour's stance and already accusing the government of being silent on the prospect, is nurses' union MUMN. Its president Paul Pace is insisting that sustaining pensions should come from taxing luxury goods. "Brussels should be recommending the government to curtail its reckless spending, curb tax evasion, or tax luxury goods such as swimming pools and expensive cars and yachts to make pensions more sustainable."

Can we work more?

Solutions? One suggestion, Central Bank governor Josef Bonnici has opined, is that government's matching contribution is reduced over an extended period of time. So when times are good, during a period of economic growth, the extra revenue generated from increased national insurance and income tax contributions gets hived off to pay for the reduced subvention. This would be suspended during times of slower growth.

"Such a scheme would be justified as one which reallocates resources from current to future consumption, and the reallocation would occur only during a time of relative prosperity," Bonnici has said.

Another solution Bonnici proposes is rethinking the way government finances capital expenditure, using special purpose vehicles to generate the revenue for capital projects (such as the €80 million parliament building) or even a development bank to utilise various assets of government that are presently under-utilised.

The question remains whether it is even acceptable to have people working beyond the age of 65, and retiring at 70 - is this an unacceptable proposal that risks changing the way we appraise our quality of life?

Gerontologist Marvin Formosa, a lecturer at the University of Malta, says that a difference has to be made between the socio-economic realities of workers.

"You have to consider the healthy life-years that people have after the age of 60... some workers will have a propensity to continue working, such as teachers or other professionals who can put their intellectual capabilities to work.

"But you cannot expect somebody who's been a construction worker all their life to want to continue working, especially if they have only their physical capabilities to offer."

Formosa says that the neo-liberal approach of raising retirement age presumes that only more people working can improve the sustainability of pensions.

"It does not distinguish between women and men, so in the case of Malta we see a very low employment rate of women aged 55 and over," Formosa says - pointing to the fact that 80% of older women don't work, and 41% of those registering for work in Malta are aged 45 and over.

"We need to ensure that we raise the rate of employment for workers aged 55-64, and allow older workers to choose when to retire, and not have them retire at 61. Otherwise we would be putting the cart before the horse."

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Josanne Cassar
Government should not change the goal posts for those who are already in employment as was done in 2006. What the PN did in 2006 is similar to changing the rules in the middle of a match. Any changes should apply ONLY to new employees coming on the labour market. This is what the UK did to its civil servants in 2006. When Labour introduced changes to the pension schemes in 1978, they were directed to those who will be employed after January 1979, even though the PN has been criticising Labour since then. THUS CHANGES SHOULD NOT EFFECT THOSE WHO ALREADY ENJOY CERTAIN CONDITIONS!
nigel mifsud
If one has the health, working up to 70 is all well and good, once the current mentality of not responding to job applications from anyone over 50 changes. Anyone in that category will know it is a waste of time applying, unless of course you accept the slave-labour rates being offered for teaching 'tourists' English or have 'right' connections. Otherwise it just a matter of more years fending for yourself.
What are we suggesting now? You should die at 75 because of our economy!!!!!!! or work till you drop dead. Less pensions better economy? No wonder religion & socialism are out of fashion these days of EUROPEAN progress. the human
George Muscat
It should be an option, but pension should be given when due.

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