Bridging the welfare gap

Malta is facing problems in financing its welfare services partly on account of a falling birth rate and an aging population. It is proper that an assessment of the fiscal burden is made before reforms are introduced or whenever changes in benefits are made.

Some years ago, the welfare gap had been called a "time-bomb". To defuse it one has, in the first instance, to have a clear idea of its meaning and a logical understanding of its financial significance.

Updated information released by the National Statistics Office shows that in 1999 the expenditure on contributory benefits amounted to Lm117.2 million, a figure which in 2002 rose to Lm138.8 million, an increase of 18.4 per cent. These are considerable amounts which absorb a substantial part of the exchequer's annual revenue.

Critics say there is no fiscal encouragement to invest in private funded pensions schemes.

Tax concessions may also be considered in respect of returns on pension investment funds.

Let us consider what difficulties other European countries are experiencing.

The German economy is stifled by a hugely restrictive and intrusive web of labour regulations. This resulted in creating one of the most expensive, inflexible and over-protected labour forces in the western world. The hourly cost of labour in manufacturing industry in western Germany, including wages, social security and pension contributions is 13 per cent higher than in America, 43 per cent higher than in Britain and 53 per cent higher than Spain's.

For instance, it is easy for German workers to report sick and they often do. Workers are entitled to six weeks of sick leave on full pay.

Thus, taxes and social security contributions are considered as too high.

On the other hand social security payments, pensions and healthcare arrangements are too generous. The biggest drain on the German welfare system is the funding of public pensions. On average, Germans retire at just over 60, earlier than most workers in western economies, despite an official retirement age of 65. It is calculated that public pensions already take up 12 per cent of GDP.

In Malta, since 2000 we pay 20 per cent of wages, shared equally by the employer and employee, in national insurance contributions. Unless urgent reforms are set in place the rate will have to go to 33 per cent in order to remedy loss of revenue due to the demographic effect of fewer workers and an aging population.

In Germany, the combined rate paid by employers and employees has recently been raised from 19.1 per cent to 19. 5 per cent. This may appear to be an adequate percentage sufficient for a normal aging population but Germany's population is greying fast.

As is the case in Malta, there are a number of EU accession countries that are seriously reforming their welfare system and liberalising labour laws. To mention one, the Czech Republic has embraced pension reform but with a different emphasis to that of other former communist countries like Croatia, Hungary and Poland. This is in sharp contrast with Malta which follows a single pillar style as against the two-pillared system advocated by the Czech Republic.The Czechs use a model which constitutes a first pillar provision providing a higher than subsistence pension together with a voluntary second pillar. Contributions to the second pillar enjoy substantial tax relief but it is clearly not intended to supersede first pillar provision.

The legal reform of the old Communist era system was completed in 1992. The new system set a contribution rate of 26 per cent of gross payroll - that is 19.5 per cent is payable by the employer and 6.5 per cent by employees. However, notwithstanding this important reform a combination of economic recession in the late 1990s and a widespread use of early retirement has created a growing deficit on the Czech pension scheme.

These schemes are pre-funded on a money purchase basis without minimum return guarantees. Membership of the funds is open to all workers although in practice some workers have membership locked in banking and insurance and are effectively employer specific. Take up has been popular and one finds that almost half of the five million working population has joined.

At a PKF seminar last month, the Deputy Prime Minister, Lawrence Gonzi, said that the present two-thirds pension should be retained as a basic denominator in any reform plan. In his opinion the quality of life of future retirees should not be sacrificed.

The people are, thus, entitled to get back that which they paid into the system. Successive governments, therefore, have a legal and moral obligation to safeguard our country's welfare system and make it sustainable.

The president of the Federation of Industry, Anton Borg told the conference the country should not discuss the minimum wage in isolation from the pensions dilemma but should also consider these issues in the light of the government's deficit, public debt servicing and the welfare system in Malta in its totality. Whatever reform scheme is adopted, its provisions and introduction must take into account the indirect effects on the overall economy, with particular reference to its effects on the competitiveness of Maltese industry and on the local employment situation.

Ironically, the lively debate on the reform of the welfare system which ensued after the PKF seminar has diffused the acute sensitivity among the social partners. In the past the subject had been considered as a hot potato by the political parties, employers and unions. The general consensus at the seminar pointed to the political and social imperative that is pushing us all to be proactive.

Malta cannot postpone to tackle its welfare reform and risk damage its competitiveness level within an enlarged market. Politicians are aware that the time is ripe for a White Paper to be issued preferably before the next budget.

Pragmatists contend that funding the public health sector through social contributions must end and a three pillar payment system introduced in a gradual basis as advocated by the World Bank. This comprises a pay-as-you go state first pillar, a mandatory pre- funded second pillar and a voluntary pre-funded third pillar.

Let us strive to put our house in order given that we are only a few months away from joining the enlarged EU community.

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