Enjoying the twilight years

Solid pensions and a buoyant welfare state depend a lot on the strength of the economy reflected by the propensity of politicians to cater for the elderly. It is reassuring to note that, notwithstanding the political upheaval that rocked the island following the abrupt resignation of a Prime Minister, a Chief of Staff and a Tourism Minister, the economy so far seems resilient.

In fact, a credit agency – DBRS – recently noted that Malta’s external position continues to strengthen, led by fast-growing service sector exports. It further mentions that our financial system remains sound, underpinned by its conservative core banks’ healthy levels of capitalisation, liquidity and profitability.

Our efforts to diversify into Blockchain, aviation, cannabis and film-making will pay dividends. Brexit helped us attract some UK companies. This is a welcome prognosis but we cannot rest on our laurels. There is a fly in the ointment: our state pension and welfare benefit system are both based on a basic “pay as you earn” pattern. This means that today’s workers pay contributions into the pot for today’s pensioners but there is no fund to sustain future exigencies.

The scheme works on the theoretical assumption that about four workers contribute for each living claimant. As can be ascertained due to better healthcare, claimants are living longer so we need more workers to put their shoulder to the grinding wheel. Healthcare costs continue to escalate.

It is an inescapable truth that we are not going to have enough money to pay pensions, which means that the retirement age will have to continue to rise, but even that will not be enough. Ideally this problem needs a serious study, as the pensions time-bomb is ticking fast.

This is a conundrum, since Malta relies principally on a one pillar state scheme and has a marginal infrastructure to sustain second and third pillar schemes, albeit a number of incentives have been introduced to encourage workers and employers to ratchet up the contributions.

As has been said before, we need to address the elephant in the room – which means helping people to have bigger families and attracting more foreign workers to build up the pension fund. In the process, many agree that the existing state pension, based on two-thirds of retirement salary, is capped at too low a rate (only parliamentarians and the judiciary enjoy uncapped pensions). The present capping does not sustain a decent living in spite of annual cost-of- living supplements. Something has to change, and while some Western countries rely on immigration to fill the gap in labour, pension and other requirements, for us that is not always possible. The demographic time -bomb is real: we are just not having enough babies. We need more shoulders to the wheel – to buy the goods and services we are selling to have an economy, to allow us to have jobs and careers, to pay for pensions and to care for us when we are older.

This dilemma has been given lip-service by the media or examined with the typical myopia of the party apologists who cheer us up saying that the national debt is receding and there is a modest surplus in the budget. Statistics say otherwise: the number of people in Malta who are on the poverty line reaches a staggering 90,000. This may seem exaggerated, especially when we hear of various welfare handouts and millions collected annually for charity stunts such as Strina. Reality, however, speaks of people living rough in garages or private cars as they cannot afford the rent.

But it is not all doom and gloom. Due to a buoyant economy, in the past five years, we have attracted around 70,000 immigrants who swell our population. There was social resentment to this sudden increase, with some xenophobic attitudes raising their head, yet we do need such workers and hope they integrate and go on to raise a family here. In essence, it is true that the annual cost-ofliving increases look great on paper but in reality they are just papering the cracks – the pension problem remains.

Typically, we notice how, three years ago, in a bid to encourage the introduction of voluntary second pillar pensions, the Government rolled out a tax concession. The concept is welcome but a lot depends on how quickly it is taken up by employers – who can benefit through a tax credit on profits earned, calculated as a maximum of €150 for every €1,000 contributed.

One appreciates that the unions are not too keen to burden members with more contributions (apart from the obligatory state pension) to build up a second pillar. It is interesting to note that, in the past, the GWU has recommended amendments to the Social Security Act which will see the legislation divided into two separate Acts – one for retirement and pensions, and the other for Social Security and Welfare. This way, we can measure more accurately the shortfall needed to increase the pension capping.

Unfortunately, poverty at retirement age is still a social problem that most Western countries have to face. One expects more effort to fight relative poverty and social exclusion as these factors affect various communities. A noteworthy observation is that, locally, almost 70 per cent of families rely on a single pension these days. For this reason, it is important to focus on reality that households composed of two people or more only receive one pension. Without another source of income, these families fall below the poverty line.

Individuals who live in poverty are more likely to produce adverse outcomes for themselves (ie alcohol and drug abuse) and for society (an increase in criminal activity). Ideally, a reform of the state pension results in an adequately funded asset pool to be invested wisely in designated low-risk sectors. Quoting a survey published by the stockbroker AJ Bell, six of the 10 best-selling investment funds with pension savers proved to be investment companies.

In conclusion, under the baton of our energetic Prime Minister, we hope the economy continues to march along at a steady pace. Only this way can workers in Malta earn a sufficient amount to be able to supplement the state pension with a comprehensive income from a second and third pillar structure.