08 March 2006

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Business Today

A half-baked reform

The pension reform proposals outlined by the Prime Minister last week were a positive step forward but they still fall far short of a thorough reform required to ensure pensioners enjoy a high standard of living within a sustainable financial and economic framework.
Former finance minister Lino Spiteri writing last Sunday stated that government’s proposals are “not enough and time is running late”.
“Better mull and conclude well, than decide in haste. But if pension reform is to be an issue fashioned in the round, further relevant proposals are required,” Spiteri wrote. “Reality knocks incessantly along the passage of the years, whether we allow ourselves to hear it or not,” the former finance minister concluded his piece in the Sunday Times.
Lino Spiteri is right. After 10 long years of discussions, studies, reports, commissions and what not, government has still yet to decide on the best way to finance a pension bill that is expected to inflate dramatically because of demographic reasons.
A lot still has to be explained to clearly show how the amendments outlined by the prime minister are expected to increase the income for pensioners. The combined changes of gradually raising the maximum pension to Lm9,000 and the method of working out the employees average wage - the best 10 years in the last 20 - do not necessarily guarantee a better income for pensioners.
While the current economic circumstances do not permit an increase in the social security contribution paid by employers and employees, the reform stops short of opting for the neutral cost option whereby one per cent of contributions are re-directed into a dedicated pension fund, administered by the State in partnership with the private sector.
With his eyes firmly set on controlling the deficit, Gonzi has relented on starving government from part of the revenue generated by social security contributions. In essence he is arguing on the same lines as Alfred Sant who has consistently, even if in our opinion mistakenly, stated that pension reform should only be considered after the economy is put on a sound footing.
Unfortunately, the suggestion once made by John Dalli to earmark part of the social security contributions for dedicated funds such as pensions and health has remained just that. Gonzi has lost the opportunity to pronounce the necessary change to create a pension fund partially financed by the current social security contributions.
Such a move would have been a bold one indeed even if it requires a thorough update of our welfare system to determine where cost savings can be made both in terms of administration costs and actual welfare hand outs.
But the proposals also skirt the issue of private pensions. This leader argued recently that a mandatory private pension scheme is socially and economically undesirable at this particular point in time. The least we expected was for government to spell out the legislative framework to allow and encourage people to take up private pension schemes on a voluntary basis.
The so called private pension schemes offered by various financial institutions do not fit the particular scheme of a retirement pension even if the workings are very similar. A legislative set up regulating retirement schemes and tax incentives to encourage people to go for them are required sooner rather than later.
Pension reform cuts across political divide. There may be ideological differences on certain aspects of implementation but every government administration from now on will have to face the problem of a larger cohort of pensioners and a diminishing workforce.
It will be unfruitful to mire the debate in unwarranted partisan bickering. Sant’s initial jibe that the exercise resembles a mountain giving birth to a mouse may characterise the general feeling that Gonzi’s proposals do not go far enough, after a 10 year wait.
But political rhetoric should not cloud the opposition’s judgement. Pension reform can be one of those areas where cross party consensus can be found in the national interest.
This leader expects the opposition to be constructive in its criticism, proposing changes that can improve what is on offer.
Last Sunday, incidentally, both Lino Spiteri and John Dalli made reference to the political consensus achieved in the nineties over legislation that sought to put financial services on a sound and competitive footing. Today, the country reaps the results of that positive move.
Pension reform should not be used as a political sword. It is time for bold decisions to be taken and politicians of all shades and colour need to rise above their short-term petty concerns and address change with a long term view.

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