The Labour government is banking on the influx of foreign workers to finance Malta’s pension system. This is the same system which is using revenue from today’s social security contributors to pay today’s pensioners and which will therefore require tomorrow’s social security contributors to pay tomorrow’s pensioners, unless sustainable reform takes place.
In the meantime, Malta is undergoing the process of an ageing population, which means that in the future there will be comparatively less workers available to finance the increasing number of pensioners. The difference between the two demographic groups decrease if more women and foreign workers enter the labour market and/or if the pensionable age is increased.
As things stand, an increasing number of women and foreigners are entering Malta’s labour market, and I would not expect any political party to say it will increase the pensionable age in an electoral programme. It is only reasonable to expect that more women enter the labour market, and here one hopes that a corresponding number of men get more involved in caring duties in addition to employment.
But I do not think that one can make safe predictions on the influx of foreign workers. The current influx is taking place due to Malta’s current economic conditions, and any economist knows that economies are subject to different cycles and turns. For example, if demand for property construction decreases, there would be less of a demand for foreign workers to be employed in this sector.
The government’s avoidance of second pillar pensions is myopic, in that its vision is excessively dependent on current economic realities
Let us look at current figures related to this matter. The number of social security contributors in Malta, which includes both Maltese and foreign workers, has increased by 38,105 between 2012 and 2016, an increase of 23 per cent. A corresponding 31 per cent increase has taken place in national insurance contributions, from €194 million to a staggering €255 million.
It is unclear how much of this is paid by foreign workers, whether EU or third-country nationals, but it is safe to assume that their contribution has increased significantly.
If we go back seven years, government’s pension consultants had shown how pension sustainability was in doubt due to a smaller future workforce, a lower fertility rate, and higher longevity. They had suggested the importation of skilled workers, the linking of retirement to life expectancy and the introduction of a second pillar pension.
The latter is a compulsory scheme through which workers have an extra insurance scheme which cannot be used by government for other expenditure. Labour market participants could top up contributory pensions through extra savings that help guarantee a better pension upon retirement age.
In my view, such a scheme could be made more socially just if the government would then assist those who cannot participate in such a scheme due to genuine socio-economic reasons.
In the meantime, there was a change of government and a new pensions strategy was published in 2015. Second pillar pensions were written off and more emphasis was made on the increase of female and foreign workers in the labour market.
In line with my argument above, I think that the government’s avoidance of second pillar pensions is myopic, in that its vision is excessively dependent on current economic realities and on electoral cycles.
The Labour government also banks on third pillar voluntary private pension schemes. There is nothing wrong with such schemes, but they have two main problems.
In the first instance they are more likely to attract and reward high-income earners to invest in personal pensions. Secondly, many people do not invest in such long-term considerations, thus opting out of such schemes. The pensions system requires a caring government if sustainability and the common good are major social goals.
Unfortunately, the government does not seem to be considering less favourable future economic scenarios which could result in less foreign workers contributing to the pensions scheme.
It would be more prudent to consider the increase in pensions by foreign workers as a windfall and not as a sustainable revenue stream to finance pensions. Pensions reform may not be the sexiest topic on the agenda, but we are in it together and a national consensus on the matter is needed sooner rather than later.