Last Updated on Saturday, 10 June, 2023 at 9:16 am by Andre Camilleri
When the increase in the retirement age from 61 to 65 years was recommended in 2004, one challenge that required resolution was whether a single retirement age should be applicable for all, irrespective of the nature of their work.
Data at the time showed that blue-collar workers had a short life expectancy of three years compared to white-collared workers.
The reformers proposed that there should be a conditional exit pathway: that a person had to work up to 61 years of age (the previous retirement age), had to meet their full contribution accumulation history (in the case of a person born on and after 1962 this is 40 years), and would have their actual pension reduced by 7% for every year they retire early. The idea was that a person would not enjoy a full pension if they opted for an early exit pathway, receiving a reduced pension whilst still being able to work. At 65 years, that person would then enjoy the full retirement pension.
The government did not fully implement this recommendation. There was a concern that such an early exit pathway would dilute the impact of the new retirement age. For this purpose, whilst maintaining the concept of an early exit pathway from the labour market, it set the condition that early exit would exclude a person from actively participating in the labour market.
In December 2021, I teamed up with the Chamber of Commerce and the General Workers’ Union to assist them in putting a joint statement on pension reform to present to political parties before the 2022 elections. One of the measures we presented was to replace this “all-or-nothing” condition relating to persons who opt for an early exit with a flexible retirement framework.
The reasons we based our rationale for change are various. The current mechanism prevents employers from legally retraining or recruiting from a pool of skilled senior citizens immediately available in the labour market. In an economy where full employment dominates, employers have to import labour – at a high cost: relocation, culterisation, training, and ramp up to productivity, to mention a few. Data by the Central Bank of Malta shows that 50% of imported labour leaves Malta within the first 12 months of coming here and a further 20% by the second year – requiring a further cycle of labour importation.
The concern expressed when the initially early exit pathway was mooted nearly 20 years ago that this would be used as a means of opting out of the labour market has not been realised. The 2020 Pension Strategic Review document states “that 80% of persons who were born in 1951 remained in full-time employment after they reached age 61, nearly three-quarters of the cohort born in 1957 was still working after that age … the pension age rises have boosted the labour supply significantly, leading to thousands of workers staying longer in economic activity. Moreover, this has tended to be in sectors heavily affected by ageing. It also indicates that concerns about certain workforce groups being less able to work beyond the early exit age have not materialised. Manual workers have had a faster increase in their post-61 employment rates, possibly contributing to less inequality in retirement income provision.” In short, the culture of continuing to work past 61 years has taken root.
Furthermore, people opt for an early exit pathway, not necessarily for leisure. People may have to exit early for personal health reasons, to provide informal care to their loved ones, or to provide care for their grandchildren as their children and spouses work. People who wish to work despite being banned because of triggering early retirement choices will find a way to do so. They will engineer employment in the shadow economy resulting in revenue leakage to the government from direct and indirect taxation and social security contributions.
Finally, this policy contradicts EU and government policies on active ageing. I suspect that many people who have opted for the early exit pathway would be willing to continue to be actively engaged in the labour market if they had the opportunity to do this on a flexitime basis.
The forthcoming 2025 Strategic Review should take a strong look at the recommendation presented by the General Workers’ Union and the Chamber of Commerce that a flexi-retirement framework replaces the current all-or-nothing policy instrument concerning early retirement. A flexi-retirement framework can be designed in different ways.
One potential model would be to set a minimum number of hours that must be worked, a lower pro-rated pension income when retiring before the person’s statutory retirement age, and so on.