The Malta Financial Services Advisory Council has put the urgent need for pension reform back on the agenda of public debate. We touched on this issue in last Friday’s editorial about the new strategy for financial services. But it is important enough to warrant a deeper examination, even though the once dubbed ‘demographic time bomb’ has, to some extent, been defused by the importation of foreign labour and the influx of women into the labour force.
The council has recommended that employees should be enrolled in an obligatory occupational pension system. It noted the current government’s reluctance to address the challenge of pensions sustainability by raising the retirement age or increasing national insurance contributions made by employers and employees.
The Social Security Department’s website, in a feature called Pensions Reform Information 2020, gives details of progress made by the government-appointed Pension Strategy Group in reviewing the Social Security Act regarding the state pension system. It says: “The terms of reference presented to the PSG by the responsible minister specifically excluded the presentation of recommendations related to the increase of (a) statutory retirement age and (b) social security contributory rates.”
Social security is the central pillar of old-age security for most low- and middle-income families. Opinion polls conducted in some western economies suggest that a sizeable majority of people, even those under 35, favour tax increases over benefit cuts to restore the long-term solvency of social security. So, what is the right formula for reforms to enhance fiscal sustainability of public pensions against the background of demographic ageing?
Some western EU countries have introduced reforms through supplementary or private pensions. Their occupational pension schemes have become an increasingly important source of retirement income, mitigating the risk of financial insecurity for older citizens. However, introducing funded pensions in central and Eastern Europe was not always successful. The responsibility for the provision of retirement income must not be moved mainly to employees, who are already struggling to cope with low incomes.
Pension reform needs to be accompanied by structural changes in the labour market, such as the rising economic activity of women, increased educational attainment levels and improved health. Admittedly, women’s participation in the local labour market has improved significantly over the last two decades. However, more must be done to raise the effective retirement age of workers.
Early retirement schemes should be more restricted in order to encourage later retirement. Flexible retirement pathways facilitating longer working lives and discouraging early retirement are becoming increasingly widespread. This is not so much a result of some governments’ concern about the sustainability of public pension systems but of the shortage of labour to keep the economy ticking over. Achieving pensions that are fiscally sustainable, financially adequate to mitigate the risk of poverty for older people and socially fair requires additional measures. Enabling more people to work and to do so for longer requires substantial changes in labour practices. Enhancing the employability of older workers, combating age discrimination and adapting workplaces to respond to varied needs are some of the tactics that would support a pension reform strategy.
The pensions reform process will never be easy, as evidenced by the social unrest in France due to President Emmanuel Macron’s insistence on raising the statutory retirement age. Reforms must be carefully prepared and rolled out gradually to achieve a broad social and political consensus on the reform rationale.
The shrinking of the working-age population cannot be addressed mainly by importing foreign labour. Encouraging more people to work longer and improving labour productivity would address the growing pension reform priorities and the current labour shortage.