One cannot tackle the subject of pensions without analyzing the economic environment that are prevailing. Many consider pensions and their sustainability during the current meltdown of global economies as the last problem on the list of troubled finance ministers.
In reality, the pensions problem is looming larger than the sub-prime crisis that sent banks in the US such as Lehman Brothers to the wall.
At home, it is good to reflect that the Nationalist Party has not sat on its laurels and had embarked on reforms a decade ago.
Thanks to the studies that were conducted, quite an awareness has been generated, and sustainability is closely linked to the “pay as you go system.”
This means that the fund does not exist and today’s workers contribute for today’s pensioners. This sustainability gap is defined in a recent EU report as the size of the permanent adjustment that is required to keep the public finances sustainable. Not making this adjustment would have the short to medium-term effect of increasing debt, before serious sustainability concerns start affecting countries’ abilities to raise debt as the perceived long-term risks increase.
In the absence of an adjustment, by 2060 the EU government debt-to-GDP ratio could be more than seven times larger than it is now.
The sustainability indicators quantify the gap that must be closed to ensure the sustainability of the public finances.
The larger the value of the gap indicators, the greater is the necessary adjustment to the structural primary balance to ensure sustainability.
Of course, now there is a general awareness that the demographics are not to our advantage as the birth rate is slowing down while pensioners live longer partly due to better health services.
Capping To compound the issue, some are quoted to lament about the discrimination between ordinary citizens and MPs since the latter get an uncapped two-thirds pension of the current MPs salary while lesser mortals have their pensions capped at a much lower level.
Other refinements are expected to remove anomalies on further discrimination by allowing different capping ceilings depending upon the year you were born.
To elaborate on this anomaly one can state that citizens born on or before 31 December 1961 retiring on 1 January 2007 or after, their income shall not be more than €16,207.78 and for others born on or before 31 December 1951 the maximum ceiling is €17,470.30.
The ceiling increases to €20,964.36 for those born 1952 to 1961.
In my opinion, unions and pensioners associations need to reach a consensus to fight these injustices in Court and also in the European Court of Human Rights. The bleak news is that statistically it is proven that unless urgent reforms are set in motion, 20 per cent of those over 65 may be facing the risk of poverty.
The EU has just finalized a Sustainability 2009 report spearheaded by Marco Buti (director General Economic and Financial Affairs) which examines in great detail all the 27 members internal positions and assesses the remedies necessary to bring back a level of sanity in their finances. In this report, Malta appears to be at high risk with regard to the long-term sustainability of its public finances. The long-term budgetary impact of ageing is well above the EU average, mainly as a result of a relatively high increase in pension and health-care expenditure as a share of GDP over the coming decades. It goes without saying that the welfare state is hampered by rising costs of health care. This is directly proportional to the age structure of the population and the free medical care system in Malta is reaching a breaking point unless some remedial action is taken to introduce the second pillar in pension and welfare financing. In practice this involves new national schemes taken up by citizens with private insurance bodies.
National debt Naturally the national debt has a negative effect by way of burgeoning annual servicing costs and compounds the impact of population ageing on the sustainability gap.
There is no respite for our hard working Minister of Finance.
Only recently, the Commission in a separate missive has given the government a warning to narrow the financial deficit to acceptable levels. Equally relevant is the advice by the Central Bank in its quarterly review commenting unfavourably on the high inflation rate.
This has a double-pincer effect on pensioners considering that their investment income has dropped due to lower interest rates paid by banks while inflation means higher product prices and fuel bills. As can be expected, the Opposition expects a generous budget for 2010 .
This creates a dilemma since it is not politically viable to tax more but to achieve more revenue, some trimming in social expenditure is indispensable. By comparison in Ireland, once the famous Celtic Tiger which manifested economic excellence within the Eurozone, is now itself facing dire times.
Public sector There were talks about downsizing the public sector to save money but still the government has found it extremely difficult to cut the earnings of its own employees.
Data in the Sustainability report has showed Ireland among the EU’s 27 Member States to be one of the first to enter into recession.
Still the drop in economic growth was more severe on its pensions shortfall and marred the future of its sustainability due to high national debts.
The Irish Cabinet in February imposed a pension levy on public sector workers and froze their pay to help reduce a budget deficit that has risen to 12 per cent of GDP this year.
The introduction of the pension levy sparked unusually large protests of 100,000 people in Dublin, but analysts say the depth of the recession will limit the unions’ ability to strike to resist wage cuts.
By comparison our Minister of Finance’s armoury to cut expenditure is rather limited unless one reverts to introducing a reduced working week in the civil service something which may ruffle a lot of feathers. Further south we read in the Sustainability report that Britain struggles to emerge from a deep recession and a forecast deficit this year of £175 billion.
The reform Back to Malta, many people will also be surprised to learn that the reform which took off almost a decade ago, and was left to be concluded, left the ceiling of the two-thirds pension untouched, and due to higher inflation, this continues to fall in real terms.
PKF had in fact organised a national Pensions reform one day conference in 2003 attracting comments from speakers of top unions, employers, insurers and senior politicians from both sides of the House.
This culminated in creating some pressure on the incumbent party to speed up its ongoing reform which was concluded in 2006. The 2006 reforms were a step in the right direction but unions say they not deep enough and the second pillar was left to be optional so as not to unduly burden employers.
It practically left the ceiling unchanged for pensioners retiring within five years but took a prudent approach by recommending a gradual increase in retiring age over the a span of years. Certainly any top-up in pensions in the 2010 budget has to mirror the strength of the economy and due to the credit crunch this is not firing on all cylinders at the moment.
The bitter truth is that we either face reality and take action to reform our State finances or else risk thousands of future pensioners to a life of poverty and deprivation.
Partner at PKF – an audit and business advisory firm