A general overview of the current Maltese pension system & an analysis on potential reforms

Abstract

The sustainability of the Maltese Pension System remains one of the most debated topics, questioned by both professionals in the industry and the general public. It is evident that if no sustainable proposals for future reforms come to pass the current PAYG system would eventually fail economically and would not be able to sustain the Maltese Pension scenario efficiently. Maltese population trends and demographics indicate clearly that the PAYG is becoming unsustainable by showing an aging population, partially due to an increasing survival rate. Meanwhile, birth rates in Malta have been declining since 1992 to 2005 and every year thereafter; mainly due to late marriages and excessive housing costs borne by first time buyers. As a result the dependent population is weighting the burden faced by the working population, which will, in turn, undermine the sustainability of the PAYG system. According to the AWG 2005 projections, public spending on pensions is expected to increase from 7.4% of GDP to 10.2% of GDP which would be at its peak, until it starts to decrease again to 7.0% in 2050. Various short term measures have been implemented by the government to address the problem including: - Increasing the retirement age to 65, therefore progressively increasing the contribution period for the accumulation of the PAYG system - Increasing the female participation rate by incentivising females to join the labour force, thereby strengthening the social security contribution base In relation to this, in 2005, a group was assembled to address future deficiencies the PAYG system may develop; this group was called the Pensions Working Group. Still in operation today, the Pensions Working Group continuously researches and proposes potential reforms for a more adequate and su This research project sought to achieve a clear perception of public knowledge relating to various aspects of the current pension system, such as satisfaction with the PAYG system, and general awareness regarding the economic implications endured by the mentioned system. It further sought to investigate general public opinions with regards to private voluntary savings and whether a 'save for your own pension' ideology is preferred over the current state provided pension system. The study also focused on obtaining a reliable analysis on the sustainability of various potential reform proposals brought forward by the Pensions Working Group in a final report recognized as the 'Strategic Review on the Adequacy, Sustainability and Social Solidarity of the Pensions System', published in 2010, through interviews with professional practitioners in the financial services industry possessing an in-depth knowledge of the current Maltese Pension Scenario. The findings brought forward by the research project suggest that the PAYG system is in a very susceptible position and must be attended to, as quickly as possible. While the 2006 pension reforms assisted heavily in postponing such deficiencies to future dates, the need for more sustainable, longer term reform is imperative in the salvation of the Maltese Pension System. This study highlighted that the Maltese population is particularly uncertain on various aspects surrounding the Maltese Pensions scenario; in line with this situation, the findings advise that an educational campaign be put into action to facilitate the implementation of any future drastic reforms resulting from a further increase in the retirement age and the introduction of a mandatory Second Pillar Pension. Regardless, however, findings indicate that until any long term reform is implemented, focus should be on maintaining, as much as possible, the sustainability of the PAYG system by facilitating and stimulating Social Security Contributions.