Our pensions system

Philip von Brockdorff, an academic economist, writes at length (‘Do we need third pillar pensions?’ The Sunday Times of Malta, November 24) about the Union Ħaddiema Maqgħudin’s Budget comments on pension reforms, which it insists need implementing sooner rather than later.

Von Brockdorff’s piece centres on the claimed unfairness of fiscal incentives for third pillar private pensions (favouring the higher earners) and the presumed unsustainability of our current first pillar social security two-thirds pension.

The gist of the UĦM’s comments was, in fact, about their recommendation for a mandatory second pillar occupation service pension to supplement our current first pillar.

Neither von Brockdorff nor the UĦM, in actual fact, explain the basic problem with the current arrangement for national insurance contributions and the first pillar pension system.

National insurance contributions were originally ring-fenced for pensions and work-related benefits, with the pension-pot being made up with contributions from the employee, the employer and the State (one third each).

Ring-fencing of the pension-pot was later removed and a significant portion of national insurance contributions have subsequently been used to fund the ‘free’ health system. The primary unsustainability problem is the health system, not the first pillar pension system.

Writing in The Malta Independent On Sunday of October 11, 2009, former MP Josie Muscat claimed that “way back in 1979, concurrently with the introduction of the so-called two-thirds pension scheme, the then Minister of Finance said in Parliament that the health service was free as a consequence of these changes. This is a fiction that has never been translated into law”. He continued that “the first requirement in cleaning up the welfare mess is to remove the accumulated fictions of the last 30 years and define precisely: (1) how the various benefit areas are truly financed (2) what benefits are covered by Social Security contributions and (3) what benefits are financed out of tax revenues only”.

Both von Brockdorff and the UĦM avoid pointing out the main problem with a second pillar pension system. Apart from the fact that it would increase both employees’ and employers’ contributions, current holders of second pensions have these pensions subtracted from their first pillar two-thirds pension.

This injustice has hit particularly hard pensioners who had more than one employment and those who have had second pillar pensions from other EU countries subtracted from their Malta Social Security pension will now be decided upon by the European Court of Justice.

May we please be spared more comments about our pension system by those who do not (or pretend not to) understand what’s wrong with it and the grave injustice it has meted out to some of our pensioners.