Malta's social conscience

The subtle and timely observation made recently by Finance Minister John Dalli on the unsustainability of our pension system triggered a new wave of interest in the overdue reform of the system.

In 1997, I chaired a committee to make recommendations for pension reform. The committee was set up by the Malta Council for Economic and Social Development and consisted of representatives of the three social partners, the Pensioners' Association as well as competent technical experts. A preliminary report was submitted some months later.

The terms of reference of this committee were generally taken over by the Welfare Reform Commission. In an interim report prepared late in 1999 by a technical team, it was indicated that the 1997 report presented results that were broadly in line with the results of new simulation exercises worked out using the Pension Reform Options Simulation Toolkit (PROST).

The present position, as I see it, is that we are all aware of certain situations that have to be addressed.

There is the demographic factor which is not influenced by or subject to policy decisions, in that aging is an irreversible process. There is also the financial aspect, which will be shaped by the wisdom or lack of good judgment in the choice of different reform options. The future strategy seems, therefore, to rest to a large extent on financial considerations.

The present debate on the social security reform seems to focus on the consideration of a two or three-pillar approach that is found in several countries.

The World Bank's model incorporates three tiers. A first public tier provides a minimum pension, usually referred to as a "safety net". This is complemented by a compulsory second tier in the form of specific pension funds and a third tier with voluntary contributions which allows for a higher retirement pension.

Of the new candidate countries, Hungary was the first to adopt the World Bank model in 1998 to be followed by Poland, Latvia, Estonia and Bulgaria.

Although we can learn a lot from the experiences of other countries, one has to constantly keep in mind the socio-economic profile of our country that may not permit the pension arrangements obtaining in the more developed and much bigger economies of western Europe and elsewhere.

But whatever form the new pension arrangements will eventually take, there are certain concepts of social justice that one should constantly keep in mind in order to ensure a fair and honest deal to present and future beneficiaries.

We should, in the first instance, strive towards a gradual change in our present thinking (some regard it as part of our culture) on the proper role of the state within the overall national social security system. The modern concept is that self-help should be a basic determinant of national welfare in that everyone should assume responsibility for providing for one's own needs on retirement so that the state's contribution should be wholly directed to those who need it most.

Secondly, any new scheme should take a macro view, in that it should be aimed at improving the quality of life of the elderly. The quality of life is a generic and overall socio-economic indicator that reflects the positive and humanitarian attributes of our caring society. Pensions and other forms of money transfers are only one aspect, albeit an important one, that enhance the quality of life of the individual.

Thirdly, the government cannot shed its responsibility for social security and should thus remain the ultimate guarantor of the pension promise.

The following guidelines may then be considered as an important corollary to the three concepts outlined above:

1. Beneficiaries under the present scheme should not be adversely affected by alternative arrangements although they may be given the option to contract out on a voluntary basis.

2. Ruling benefits and entitlements should not be changed or reduced without the consent of present potential beneficiaries.

3. The rules of economic efficiency and equitability should be the guiding principles of reform.

4. The present two-thirds pension should be retained as a basic consideration in any reform plan. The quality of life of future retirees should not be subjected to actuarial calculations.

5. Taxation considerations have to be carefully formulated if private pension schemes are introduced to supplement a public "safety net". Some writers suggest that if the contributions to a private plan are tax deductible then the retirement income received should be included in the individual's taxable income. On the other hand, if the contributions are taxable, then the benefits should not be taxed. Employers' contributions should remain tax deductible. Tax concessions may also be considered in respect of returns on pension investment funds.

6. In formulating a private fund to supplement public arrangements, it is being assumed that:

¤ the pension will be according to a defined contribution plan and will not be related to life expectancy;

¤ the benefits will depend on what was paid in the system plus the return on investment of the funds;

¤ individuals would have a property right to their benefits. On the death of a contributor, the accumulated benefits will form part of his estate and

¤ young contributors will enjoy additional benefits on retirement as a result of long years of contributions.

7. Malta could also follow the example of several countries and opt for a mandatory approach.

8. Whatever 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.

9. In the case of a public pension fund, this could be managed by a board of experts with representation of the three social partners. Similarly, private pension schemes should be approved and monitored by a commissioner or official regulator appointed by the government.

10. An official decision should be taken immediately for several reasons:

¤ individuals should have enough time to consider new contribution adjustments and new conditions of pension entitlements in relation to their personal long-term financial plans;

¤ the reform of the social security system should be considered as a national issue since it touches the lives of virtually all Maltese and time is therefore needed to develop a political and social consensus;

¤ the longer the delay in solving the system's imbalance, the more drastic the steps that must be taken and

¤ it is important that any reform be phased in over a period of time.

At present, there seems to be a clear political commitment to maintain and sustain the government's responsibility in the provision of retirement pensions. There is also a certain level of consensus that this responsibility may be shared with the private sector.

Overall, the framework of our pension reform system should be inspired by Malta's collective social conscience.

Mr Camilleri is chairman of the Malta Statistics Authority