Last Updated on Saturday, 22 October, 2022 at 5:59 pm by Andre Camilleri
With all the talk of inflation and war, people do not seem to be addressing the effect this is having on people’s retirement.
Retirement is supposed to be a time when an individual can relax and indulge in the life they have built for themselves and their family. Unfortunately, many older adults find themselves struggling to navigate the retirement phase of their lives, either because of health issues or financial struggles.
In an opinion piece in The Times of Malta, John Cassar White said that “good health and financial resilience will always be the bedrock of sound retirement planning”. He also expressed his concern that because of the constant rapid rise in costs, millennials are remaining more dependent on early boomers, which is preventing them from retiring even though they would like to.
Addressing these issues is David Spiteri Gingell, a former chairperson and member of Pensions Strategy reform, who is consulting the Chamber of Commerce and the General Workers Union (GWU) on a pension reform.
The reform seeks to promote active ageing by improving the early retirement pathway through a flexi-employment system, and give incentives to young people to save money to bridge the gap between income earned in employment and pension income by automatically enrolling them in a pension scheme.
“It was a unique opportunity where I was trusted by both parties to act as a middle ground. There is common ground that will work favourably for employers and employees and their representatives,” Spiteri Gingell said.
Currently, the Chamber and the GWU are holding meetings with the government where they have the opportunity to express why the government should give serious consideration to this pension reform.
The Malta Independent on Sunday sat with Spiteri Gingell to discuss the pension reform proposals and the effect these will have on people once they reach their retirement phase.
The 2004 pension reform sought to incentivise people to draw down a full pension and enjoy full earnings from continued employment. It increased the retirement age from 61 to 65 years of age.
“One major change we had made in the reform was to encourage people to continue to remain active in employment and draw down their pension. That was a very important reform because that brought into play people who previously did not find it economically favourable so they were opting out,” he said.
However, he revealed that one of the main issues that the Pension Working Group grappled with at the time was how to factor in people in hazardous or very demanding jobs; who, at the time, showed that their healthy life expectancy was lower by around three years than normal office jobs.
He gave the example of somebody working in construction who most likely would not wish to work full-time until the age of 65.
The solution recommended by the Group was to create an early retirement pathway for persons aged 61 to 64, during which period they obtain a reduced pension (full pension provided at 65) and continue to be actively engaged in the labour market.
However, he said that this reduced pension recommendation was not accepted by the government. Government at the time had decided that anybody who opts for the early pathway cannot be involved in employment.
“So basically it’s a guillotine,” he said.
The problem with this was that if you opted for an early retirement pension then you are not allowed to work, which works against the active ageing policy.
The active ageing policy says that people should be incentivised to remain working both for their health and their social and economic well-being.
He explained that because of this all-or-nothing approach, enterprises have been losing a core group of experienced people who may not be interested in working a full 40-hour week. However, they still may be interested to work reduced hours.
Apart from losing people that are experienced, vacancies have to be filled, and the vacancies are being filled by third-country nationals (TCN) and EU citizens.
“It brings the cost of having to relocate people, find them and bring them here. Productivity will take time. Apart from that, data issued by the Central Bank of Malta showed that most foreigners who come to work in Malta, 50% of them leave within the first 12 months, and 70% leave in the first two years,” he said.
He highlighted how the high turnover of foreign workers who need time to acquaint themselves, is costing businesses a lot of time and money.
“From a business point of view, they are suffering additional costs,” he said.
He said that the position presented by the Chamber and the GWU is to ensure that people can remain active while withdrawing a reduced pension between the ages of 62 to 64, and in doing so you’re keeping them active socially, you are giving them a sense of well-being and improving their economic situation.
“Currently, enterprises cannot tap these resources; and this is not consistent with the EU’s and government’s policies on active ageing,” he said.
Therefore, jointly the Chamber and the GWU proposed to the government to have a flexi-retirement pension pathway, where workers will have the option to work reduced hours while receiving a reduced pension between 62 and 64, on opting for the early retirement pathway.
Spiteri Gingell described this as being a “win-win for everybody”. Enterprises would be taping a highly-skilled and well-experienced workforce, retirees would be able to remain active and maintain economic stability and government would be meeting its active ageing commitments and ensuring that people who opt for early retirement can work legitimately.
Nevertheless, to ensure that such a flexi-employment approach does not become an exit route from retiring at the statutory retirement age, it is suggested that this is governed by a number of conditions, such as the number of hours the employee must work and the percentage of the partial pension.
He explained how the degree of partial pension becomes closer to 100% as you move closer to the statuary retirement of 65 years. For example, Spiteri Gingell said that this could be introduced as follows:
- Retiring at 61 years of age, the pension income entitled is pro-rated at 50%
- Retiring at 62 years of age, the pension income entitled is pro-rated at 60%
- Retiring at 63 years of age, the pension income entitled is pro-rated at 70%
- Retiring at 64 years of age, the pension income entitled is pro-rated at 85%
Increasing pension income
The other goal the Chamber and the GWU presented to the government is the importance of bridging the gap between the income people used to enjoy when they were in employment with the income they are earning in retirement.
To explain this, he first explained the current Malta pension system. He said that the pension people receive reflects 2/3rds of their basic wage up to a Maximum Pensionable Income (MPI). The MPI for persons born on and after 1962 is around €26,000 a year, which relates to a maximum pension of just under €18,000.
He said that the problem arises with people who earn more than the MPI because their pension will not exceed 2/3rds of the MPI.
“For example, a person earning €30,000, which is not crazy, on the bang of midnight on their 65th birthday, will fall their income drop from €30,000 to €17,333. That’s a major shift in one’s economic conditions,” he said.
He said that in the reforms that have been carried out since 2004, the primary focus has been to ensure a pension that is adequate, but not one that provides you with the same level of income you enjoyed during employment.
Moreover, he spoke about the problems individuals face when it comes to planning for retirement. He said that we are conditioned by what is known as behavioural heuristics, which is a branch of economics that says that our economic activity is very much shaped by our behaviour.
He mentioned how it is scientifically proven that youths do not plan their future and this is because of two primary heuristics: inertia and myopia.
Inertia refers to procrastination and postponing something which seems far away. Myopia is about people not thinking that far into the future because they are not conditioned to have that kind of thinking.
As a result of these heuristics, people start thinking about their retirement very late, when it is too late.
“It may be too late to build a retirement nest egg that gives you that buffer that bridges the income that you enjoyed in employment,” he said.
To explain further, Spiteri Gingell pointed out that people have a life cycle of financial management. From a young age when people start working, most people spend their money more freely and do not focus on saving.
Once these adults grow they will begin to carry their largest structured costs: a home, family, and/or education for children. Usually, during this period, people have very minimal room to save money.
People only begin to save once the mortgage is paid and their children have left, but at this point, retirement would be looming and it might already be too late.
“How do we get people to save?” he asked.
Additionally, Spiteri Gingell mentioned how government has implemented voluntary occupational pensions and private pensions. He said that these are supported by good fiscal incentives, however, they are still not that popular because of heuristics.
“Since government implemented this, the private personal pension uptake has been approximately 13,000, and the voluntary occupational pension has been approximately 1,300. Of note is that in both, the people who are under the age of 28, are less than 10%,” he said.
“To combat inertia and myopia you need Automatic Enrolment (AE),” he said.
AE is an opt-out system where everybody who is applicable will be automatically enrolled in a contributory pension system which people can opt out of any time they wish.
Spiteri Gingell said that if he were to design an AE system he would establish the income threshold at 2/3rds of the MPI. People below the MPI obtain 2/3rds of their wage, he believed that a 2/3rds pension replacement was fairly adequate. Furthermore, research is clear: people on low income need financial management skills in the here and now and forcing them to save for their pension has detrimental impacts.
He added that in his opinion an AE scheme should have a level of flexibility. He said that if there is a situation where someone is struggling due to certain circumstances and cannot afford to pay the contribution towards his pension, then that person should be allowed to suspend their contributory payments and resume them when they see fit. This is how it currently is with the voluntary occupational fund.
On a personal note, he suggested that there should be instances where someone should have the opportunity to withdraw money from their pension fund in certain circumstances. These would be for health reasons, to invest in a house and to invest in education. Any form of important finances to improve your life.
Spiteri Gingell said that the AE design should be such that employers are not mandated to pay a contribution. They should be brought in through incentivisation (fiscal measures) and collective bargaining.
All that being said, he clarified that it depends on the model the government wishes to adopt.
He explained that by automatically enrolling them in a pension scheme, the inertia is inverted. The very inertia that blocks a person from enrolling in a private pension, now once enrolled blocks people from opting out.
Consequently, there will be a much larger group of people who will save money and end up with a pension that is much closer to the wage they were receiving as an employee.
AE has been implemented and proven to work in countries like New Zealand, the United States and the United Kingdom.
“What makes it more acceptable is that you can design it in a way that you do not have mandatory contributions either on the employer or on the employee. You are bringing in the employer through behavioural heuristics by turning inertia upside-down,” he said.