Last Updated on Thursday, 25 May, 2023 at 1:12 pm by Andre Camilleri
Malta’s pension system was introduced in 1979 following a major reform of the social security landscape. Our system depends on demographics, an optimised labour market (retirees, females, migrants, and so on) and the closing of pre-retirement exit pathways. When introduced, the system was in the black. As it was in its infancy, it was flushing with revenue from contributions. The burden of the system’s liabilities on its sustainability (and adequacy) would occur as the baby boomer generation started to retire.
Projections carried out in 2004 for up to 2050, tenuous as 50-year projections are, showed that by 2040 Malta’s system would be teetering towards collapse – even though most of the baby boomer generation would have crossed the rainbow. By 2050 it was projected that the system would be bankrupt and the pension income of future generations would be next to worthless (receiving an average pension replacement rate (the technical term applied, which measures the relationship between average pension income and the average wage) of less than 20%). One must remember that the 1979 social security system established a social contract that defined a person’s pension income as two-thirds of the Maximum Pensionable Income.
By the mid-1990s, nearly 20 years after the system was introduced, the fundamentals on which it was based were falling apart. The fertility rate fell from over 2.5 in 1979 to 1.5. Longevity increased from 67 for males and 75 for females to 75 and 82, respectively. Loopholes to exit the pension system exploited – with over 8,000 persons on Invalid Pensions. Labour market policies designed with quasi intent to disincentivise persons from entering or remaining active in the labour force – whether retirees, females or migrants.
It was only in 1997 that the government, the Sant administration, took the first steps to study the health check of our pension system. The Reno Camilleri report and a Watson Wyatt study clearly showed that the system, unless reforms were introduced, would face serious challenges regarding its sustainability and adequacy. Gonzi picked up the ball immediately following the PN’s re-election in 1998. The Galdes Commission was set up, which reached the same conclusions as the studies under Sant, though not necessarily in tandem with reform measures to be adopted.
Dalli, in late 2003 commissioned the World Bank to carry out, yet again, another study. The World Bank report landed on Gonzi’s desk weeks after winning the PN party leadership and becoming prime minister. The report was such that it could not be ignored. The report was stark, blunt and to the point: reform now or future generations will have no pension system to speak of by 2040.
When tasked by Gonzi to lead the pension reforms in 2004, I kept asking myself why the pension system was allowed to march confidently, like the Titanic, towards an impending catastrophe. Apart from the reports I mentioned, no policy measures were introduced to shore up the pension system in the immediate and medium term, let alone to safeguard it for future generations.
I always contended, and continue to do so today, that pension income inadequacy for the baby boomer generation directly results from such policy inaction. When the pension was introduced in 1979, the Maximum Pension Income on which the 2/3 pension is calculated was based on the salary of the President of Malta – €13,980. By 2004, the MPI increased once only, in 1987, by €1,165 to €15,145: a measly increase of €48.5 annually. During that period, the average wage experienced considerable growth, and inflation eroded purchasing power.
Why was this allowed to happen? The argument is often made that the five-year electoral horizons drive politicians – and thus reforms, the impacts of which are seen in the long-term and which invariable involve some degree of pain on the voting public are avoided. The tougher the policy issue, the further they are kicked down the road. Yet such deliberate inaction invariably comes back to haunt governments and policy-makers – vide the drydocks, shipbuilding, Airmalta, Enemalta and so on. If anything, decisions deferred require tougher, harder policy actions providing politicians little room for manoeuvring. At that point, corrective actions may demand big bang solutions resulting in social and economic convulsions.
My colleagues and I on the Pension Working Group (2004) were adamant that our solutions for reform had to have an in-built corrective mechanism that secures policy action over defined intervals. I, for one, have a complete aversion to proposing reform today based on assumptions that look 50 years into the future. The environment we live in changes dynamically and in ways few predict – the financial crisis of 2008, the Covid-19 pandemic and Russia’s invasion of Ukraine – all having significant economic and social impacts on us.
The solution we came up with was embedding a trigger in the Social Security Act that mandates that politicians review the pension system regarding its sustainability, solidarity and adequacy on a pre-defined basis. The trigger introduced demands a five-year review – sufficient to assess the performance and health of the pension system, calibrate for changing circumstances, question the assumptions previously taken and measure the impacts of reforms made or for those left on the wayside.
It is a policy innovation which I believe has, in the main, served us well. Since incorporated into law, three reviews were triggered: 2010, 2015 and 2020. A fourth has to take place by the end of 2025. Furthermore, public scrutiny is assured, given that the review’s conclusions are tabled at the House of Representatives. Important reform measures have been introduced following each review, increasing the adequacy and sustainability of the pension system. Pensions as a policy issue continue to remain high on the national agenda.
It is a legal innovation, which, if it continues to be applied by politicians and senior administrators in the spirit for which it was designed, Malta should be in a position to avert a pensionocalypse.