The Maltese pension paradox: Balancing short-term affluence against a future fiscal precipice

The 2025 Strategic Review on Malta’s Pension System presents a sobering reality: while current fiscal indicators appear robust, the nation is navigating a demographic “grace period” that is rapidly expiring. To prevent a collapse of intergenerational solidarity by 2070, Malta must transition from temporary fixes to aggressive structural reforms.

Malta’s pension system is currently being propped up by a massive influx of foreign workers that masks underlying vulnerabilities. The mentioned report presents the below hard realities:

• The share of persons aged 65+ (out of the total population) is forecast to rise from 19.3% in 2022 to 33.6% by 2070;

• The Old-Age Dependency Ratio (OADR) is projected to more than double from 30% to 65%. This means that by 2070, only 1.5 workers will support each pensioner, down from the current ratio of roughly 3:1;
• In a “No Structural Reform” scenario, pension adequacy (to lead an adequate standard of living) is expected to plummet from 55% to 48.2%;
• In a “No Structural Reform” scenario the annual pension deficit is projected to hit 4.1% of GDP. This deficit is driven by total revenue falling from 7.6% to 7% of GDP, while expenditure is expected to surge from 6.2% to 11.1% of GDP. The year in which the annual net balance (revenue minus expenditure) becomes zero is projected to be 2054.

Malta’s current Social Security Contribution Fund surplus (€376.1 million in 2023) is heavily reliant on non-Maltese contributors, who increased by over 105,000 between 2008 and 2023. On the other hand, Non-Maltese workers exhibit significantly lower “contribution densities”, averaging only 22.7 weeks per year compared to 37.3 weeks for Maltese nationals The report warns that Malta must shift from “quantity to quality” by pivoting away from low-skilled labour toward high-value, high-productivity sectors that command higher basic salaries.

While recent labour market debates frequently point towards considerations on the viability of a shorter working week, the technical findings of the 2025 review suggest that such discussions are premature – and potentially dangerous – without a prior, aggressive focus on labour productivity. The sustainability of a Pay-As-You-Go (PAYG) system is fundamentally a function of economic output, whereby it is necessary that productivity gains outpace the growing proportion of elderly citizens.

The report outlines that between 2000 and 2022, the average weekly hours for full-time employees in Malta slightly decreased, while part-time engagement surged. However, the report makes it clear that the “quantity” of hours worked is secondary to the “quality” of output produced during those hours. Economic growth over the last decade was largely driven by expanding the labour force through migration rather than intensifying productivity. High-growth sectors like IT and financial services have seen Maltese workers shift into high-skilled, knowledge-based roles, while traditional sectors like construction and hospitality remain stagnant and heavily dependent on low-skilled foreign labour. Long-term wage growth, which is the only sustainable way to boost pension contribution revenue, is strictly tied to productivity growth. When productivity stagnates, real wages stall, limiting the system’s ability to shield future retirees from inflation.

To secure the fiscal balance, Malta must pivot from a policy of labour force expansion (quantity) to one of skills’ development and lifelong learning (quality). This involves strengthening vocational training and human capital investments to reduce the “migration dependency” and ensure that every hour worked generates the maximum possible fiscal return for the social security fund. In essence, Malta cannot afford to reduce working hours until it has structurally corrected its productivity deficit. The 2070 fiscal precipice demands that the nation focuses on making its workforce more efficient and high-value, rather than simply working less.

The report highlights that a critical technical caveat is the Social Security Contribution Base Erosion (SSCBE), where current laws link contributions strictly to basic wages, ignoring bonuses, overtime, and allowances. This means that the total social security base erosion reached an estimated €5.6 billion between 2008 and 2023. Had contributions been applied to total wages, the government would have collected an additional €585 million. Thus, integrating non-basic wages into the contributory framework would increase the average pension reference salary by 7.8%, directly boosting future pension replacement rates. This in my opinion highlights two points.

Thus, to future-proof the pension system, the 2025 Review outlines several mandatory structural interventions, which are mainly:

• Closing the Wage Gap: Malta must phase in limitations on non-basic wages or mandate their integration into the social security base to ensure pension fairness. On one hand this would help eliminate the practice to keep basic salary low since bonuses, overtime, and commissions are exempt from the social security base calculation. This would also help eliminate or reduce situations where individuals pay the minimum possible social security contributions throughout their working life, later qualify for a minimum pension, and subsequently complain that the pension is insufficient for a decent standard of living.
• Mandatory Private Savings (Third Pillar): The state pension can no longer be the sole income source The government must implement auto-enrolment private pension systems and expand occupational retirement plans, potentially with matching contributions.
• Dynamic Poverty Shielding: The Guaranteed National Minimum Pension (GNML) should be structurally linked to the At-Risk-of-Poverty (ARP) threshold to shield vulnerable retirees from high healthcare and food inflation^.
• Addressing Gender Inequity: Career interruptions for child-rearing significantly impact lifetime income for women. Reforming child-rearing credits, specifically for children born in quick succession or for children with disabilities, is essential to close the gender adequacy gap.
• Cohort Harmonisation: Eliminating disparities between pre-1962 and post-1962 pension cohorts is vital for maintaining social solidarity. However, while it is apparent that disparities between pre-1962 and post-1962 pension cohorts have serious implications for the pre-1962, we must ensure that lessons are learnt from a policy perspective; from the reality of having had those who continued to pay less NI than younger workers, when the NI contributions were increased, only to have them want the same pensions as post-1962 persons, once they have retired.

Beyond the above recommendations, I believe there is another delicate matter which needs revision and which, in all honesty, is like the elephant in the room. The cap on pensionable income and the cap on social security contributions has been fixed (excluding annual inflation adjustments) since the 2006 reform – 20 years. I think it’s high time this is revised. While this will be hugely unpopular, this is where policy needs to rise above popular sentiment and do what is right and just. This is a pertinent point, since as highlighted in the 2025 Strategic report, the group paying the maximum social security contribution rate (those whose basic wage hits the current legal cap) increased by 165.4% between 2008 and 2023, now totalling over 82,500 contributors.

The 2025 Strategic Review serves as a final warning. Malta must leverage its current economic position to push forward structural transitions. Failure to do so will leave future generations facing a massive fiscal deficit and inadequate standards of living when retiring. The time for incremental change has passed; Malta needs a total structural realignment of its pension architecture.