Pensions reform-A tortuous journey

Published on the Malta Today¸ issue 8th December 2010

The first signs of the economic and financial crisis appeared at the beginning of the second quarter of 2008.The recession intensified and spread across both sides of the Atlantic with a fury that was unprecedented. A midst these challenging times we meet countries who took the bull by the horn and started introducing austerity measures to prop up their finances. This included defusing their pension time bomb. France saw heavy riots when it has risen its minimum retirement age to 62. So did Ireland and Greece. Greek unions are planning another general strike against austerity measures next week. While public transport in greater Athens is set to grind to a halt during a 24-hour strike. Germany is trimming military spending and putting off the $650 million reconstruction of a palace in central Berlin.

Throughout Western Europe¸ this year being the third one since the onset of the global recession has become the year of the tough decision. Whether it’s cutting spending or raising taxes¸ the underlying philosophy is the same: If we’re to bring back prosperity¸ we must endure some pain¸ now. PKF had taken the initiative last July to invite stakeholders for a seminar on Pensions at a time when EU was urging us to take immediate remedies¸ but this created little stir among the political class:-a hot potato badly handled.

Sadly for us the cauldron for pensions is brewing at a burning rate and an acute problem is in sight irrespective of the current recession but more so due to changing demographics of an aging population. Politicians widely neither accept that demographic change and not the international sub-prime crisis¸ the euro stability nor are the credit crunch the cause of this brewing problem. There had been a steep decline in the fertility rate since the time of the baby boomers. At present¸ 18 per cent of the population was aged over 60. By 2025 that would rise to 27 per cent with a higher proportion than ever living well into their 80s¸ hence the pressure on pensions. Our pension system on a pay as-you -go is unfunded and will collapse by 2030 unless remedial action is taken now.

Naturally the structural deficit of our national budgets which has been on the increase for the past 25 years also undermine the sustainability of pensions .The feeling of déjà vu is back again that this problem is not for our undoing but we can pass it on to our children to bear the cross. Live for today and let the devil take the hindmost as for the future is a faulty political mantra. All this has been said before and the voters are now fed up being warned about the low participation rate in the labour force¸ which was among the lowest in the EU and¸ particularly¸ the extremely low female participation rate. Past profligacy has caught up with us with a vengeance. True¸ a bold attempt was made by the ex-minister of finance John Dalli who increased vat rate by 20% with the honourable aim to set the extra revenue for health care costs. This did not materialize and the FSS rate of 10 % deducted from workers goes to pay a myriad cocktail of social services¸ plus spiralling health care and any balance goes to annual pensions. Lucky for us the study working group set up by government (but without the opposition‘s participation) to recommend a serious and sustainable pension structure finished its monumental report by 2006.

The Bill based on this study was approved in parliament after the opposition voted against the clauses raising the retirement age to 65 ( staggered over the next 15 years ) while the contribu