Demographic dynamics: the unpredictable element in the pension reform

Last Updated on Thursday, 24 August, 2023 at 12:38 pm by Andre Camilleri

All of the pension reforms since 2004 had demographics and active participation at their core. The reason is simple. A person’s social security contribution today is not invested in their “personal pension account”. It is not even invested in a National Pension Fund, so contributors can benefit from the accumulation of wise investments and accrued cumulative returns from such a fund. Our system is what is known as a Pay-As-You-Go scheme. The contribution you and I pay is used to finance our parents’ pensions, as the revenue generated from such contributions is placed in the Consolidated Fund to finance general government expenditure.

Some call it a Ponzi scheme as it assumes that when you and I reach our retirement age, there will be sufficient persons working that can finance our pensions. Demographics, unlike active labour optimisation, is a dicey thing. When we started the reforms in 2004, the old age dependency ratio was estimated to fall from one retiree for every four workers to one retiree for every two workers. We used the United Nations demography data at the time to maintain the same baseline in comparing the reform measures we would propose with the dire “no reform” scenario projected by the World Bank. In essence, the projections showed that with the fertility rate below 1.8, Maltese were a dying population, with, if memory serves me right, the Maltese indigenous population falling below 390,000. At the time, we had just entered the EU and it was next to impossible to obtain work permits for third country nationals or employers acting on their behalf.

We focused on achieving an optimised labour force, sometimes called the “fourth pillar” or flanking policies. Working with other government stakeholders we proposed measures relating to increasing female participation through family-friendly measures and before and after school education. We removed the cap on pension income if retirees earned more than their pension rendering it unattractive for them to remain in the labour market. We proposed measures for targeted TCNs immigration for sectors requiring specialised and highly skilled employees in the here and now to take root and grow. We reformed the invalidity pension process – an open-door exit pathway if there was one. We also recommended that illegal immigrants should be allowed to be productive until their cases were settled one way or the other, and in doing so, providing them with dignity.

Some of the reforms resulted in rapid transformations. Females were only 30% active in the labour market in 2004. By 2018, 14 short years, they were over 60%, particularly the 35-year-old cohort, above the EU average. Some never saw the light of day, like fast routing TCNs, even though advanced manufacturing and services industries required highly skilled competencies.

Be that as it may, there are limitations to the extent that we can optimise human capital as a country. Thus, in a scenario where Malta’s demography is “dying”, the balance between pension adequacy and % deficit to GDP will always remain a conundrum.

In the 2010 strategic review, we applied the latest Europop 2009. These are population statistics drawn up by Eurostat, based on a common framework methodology and assumptions across the member states: the size-fits-all beloved principle of the European Union and the European Commission. With a decreasing fertility rate and minimal immigration assumed by Eurostat, the projections showed that the Maltese population would decrease in 2060. I believe the projections showed that Malta’s population would be less than 390,000 and with over 30%, 65 years and over.

Now we come to the 2015 strategic review. Suddenly, Eurostat, having changed its assumptions for I believe Europop 2013 particularly relating to migration – for all member states – showed that Malta’s population would not actually be dying out but would grow and significantly so to 475,000. A larger population results in more revenue earned from contributions, so the figures balancing adequacy and the % deficit to GDP started to look significantly better.

And it gets better. As stated in the 2020 SR published report and I quote: “Europop 2019 demographic projections [Europop 2019], produced by Eurostat [and] Europop 2019 projects that in 2100, the population in Malta will stand at 689,359 individuals. A significant increase in the population is projected to take place between 2020 and 2070, after which it stabilises. In 2070, the population is projected to be 706,915 … Malta’s population is expected to increase by 199,964 [on actual reported population by the National Statistics Office) or 39.4% between 2020 and 2070.”.

The Adequacy Retirement Replacement Rate – the yardstick on which pension adequacy is measured – will, for future pensioners retiring in 2070, be 55% with a percentage deficit to GDP of -3%. These projections assume that none of the reform considerations presented in the 2020 SR will be implemented. By far, they are the best-projected results achieved to date.

Minister Caruana raised a furore earlier this year when he was quoted as saying that forecasts based on the current model require that Malta’s population increases to 800,000 by 2040. Projections of the pension system, in the absence of no sustainability reforms, to achieve an APRR of marginally above 54%, which was planned by the 2004 reform group as the minimum goal to achieve for future pensions by 2050, will be based on the SR 2020 (assuming that the government takes up none of the considerations presented) will happen 20 years later than the cohort of future pensioners retiring in 2050 and a demographic base of 700,000.

The joker in this pack is demographics.

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