During the last quarter of 2022, APS Bank organised a forum on the subject of pensions and their sustainability. The event was organised within the framework of the Malta Sustainability Forum.
It is important to note that the term ‘sustainability’ is being taken to mean more than just environmental sustainability. In a small country like Malta, we need to question the sustainability of a whole spectrum of things as we need to understand fully the medium- and long-term implications of our policies. Making the mistake of adopting a short-term perspective may be very difficult to correct.
Going to the subject of sustainable pensions, there are a number of considerations.
The first consideration is that this is not a new subject for Malta. No one can claim that this issue, which is now being considered to be a crisis, came as a surprise. There was an effort to start discussing it some 20 years ago, but some key stakeholders took a short-term approach and sought to scupper the whole debate. These stakeholders did not recognise that this was – and still is – an issue which does not affect only the current population but also future generations.
There was the decision to gradually increase the pensionable age, a measure which was criticised at the time by persons who should have known better. However, this measure was just scratching the surface.
Twenty years ago, we had the opportunity to manage a change process to make pensions sustainable over a long period of time. Unfortunately, now we no longer have that luxury. Measures need to be taken now and we cannot debate such measures from a political perspective. We need to debate them exclusively from a social and economic perspective.
Pensions are part of our social welfare framework and, as such, we need to consider the level of our pensions from the equitability of the distribution of wealth and the responsibility we have as a society towards those who have contributed over the years to a country’s economic well-being.
We are running out of time to make pensions sustainable and we cannot leave the problem for future generations of workers to resolve
The fact that all persons, at a certain age, stop being producers, does not diminish their dignity. Our economy is what it is today because it has evolved over the years, thanks to persons who are today pensioners.
The 2021 Census of the Population brought out some realities we cannot continue to ignore. The trend of population ageing continued between 2011 and 2021, with the overall average age increasing to 41.7 years from 40.5 in 2011.
The census also shows that the old-age-dependency ratio has increased from 23.7 in 2011 to 27.6. This ratio represents the ratio of older dependents, namely persons older than 64, to the working-age population of persons aged 15 to 64.
It needs to be stated that were it not for the presence of several tens of thousands of foreign workers, the ratio would be even higher. These foreign workers, through the taxes they pay, are contributing towards making our pensions sustainable at the present moment. However, they cannot be seen as a long-term solution as our population density has reached a level which is unsustainable.
There are a number of measures that can be taken to make pensions sustainable. However, their impact needs to be assessed from both an economic and a social perspective.
Should we increase the pensionable age? There are some occupations which do not allow that, given the physical demands of the job. On the other hand, there are occupations which allow people to continue working after they turn 65. So can pensionable age be made dependent on the occupation?
As a rider to this point, how should income earned beyond retirement age be treated for income tax purposes?
How can we increase the take-up of occupational retirement schemes? At present, these schemes are certainly not popular among employers and employees do not always appreciate fully that they need to start planning for their retirement when they start working. Should there be specific economic measures aimed at increasing the savings rate in this country?
Should we increase the cap on social security contributions? At present, persons born after January 1, 1962, and earning more than €26,000 a year as a basic salary, do not pay any social security contributions on basic income beyond €26,000. Given that our system of social security contributions is effectively a tax, and our tax system is a progressive tax system, is it justifiable to increase this cap of €26,000?
Admittedly, any of these measures may be very difficult to implement. However, we are running out of time to make pensions sustainable and we cannot leave the problem for future generations of workers to resolve.