An Exploration into the Opinions and Thoughts of the Maltese on the Current Pension System
In general terms, poverty is defined as a person’s inability to afford an adequate standard of consumption. Poverty levels differ in nature across countries, however in Malta it is considered that the concept of relative poverty is more prevailing. Relative poverty relates to the economic status of other members of society, and is defined as the inability of individuals to afford what other society members have. EU Member States determine whether an individual is at the risk of poverty if their income level is at 60% of the national equivalised income, or less.
The latest survey on income and social conditions issued by the National Statistics Office indicates that the number of individuals who are at risk of poverty as at 2016 amounted to 69,920 individuals, which translates into an increase of 0.2% when compared to 2015. The study also highlights that the proportion of individuals aged 65+ who are at the risk of poverty increased from 23.1% to 26.1% in 2016.
Very often we hear that the pension system is not adequate enough to sustain the basic needs of Malta’s retirement generation. To this end, PKF Malta has taken the liberty to analyse this issue from a demand-side perspective, by obtaining first-hand information on the subject. More specifically, in this study we seek to analyse whether the current pension system is adequate to sustain an adequate standard of living for Malta’s retired generation. Moreover, an increasing life expectancy couple with a decreasing birth rate are threatening the sustainability of the pension system, to the detriment of public finances.
Against this background, our study seeks to examine the adequacy of the system and whether our retired individuals are actually enjoying a social life by attending a number of social events. In this study, we carried out a survey in Valletta and Sliema, and at three state-funded retirement homes. The results show that most of the pensioners are not able to save money out of their pension income, with some of the respondents claiming that they often draw on past savings. Moreover, a number of respondents also indicated that they rely on a single pension, because their spouse is not entitled to a pension. With respect to cost of living, most of our respondents remarked that costs in relation to rent, electricity, water and food are getting more expensive every year and most of the respondents stated that they do not afford household repairs.
Furthermore, a number of individuals highlighted that they are not able to be socially active and visit museums, attend concerts or even travel due to limited finances. However, when interviewees were asked about the adequacy of the pension system in Malta, most of them commented that it is adequate. The reasons for this contrasting comment could be attributed to various factors associated with conducting face to face surveys, as respondents may have felt uneasy and uncomfortable to state that it is not adequate. In reality, we may conclude that the pension (especially for low-income earners) is just enough to cover their basic needs.
Furthermore, we should also consider that if retired individuals do not have the means to feel socially included, this could have negative repercussions on the general level of happiness of the retired population. Another important aspect is savings. If most of the pensioners end up drawing from their past savings, this implies that the general level of savings in an economy decreases. Whilst consumption is a driver of economic growth, savings are essential to drive investment in an economy, is a catalyst for economic growth.
In conclusion, our suggestion is for further upgrade to the pension system over the long-term scenario. In particular, the government may consider increasing the attractiveness of the personal high-income rate account system, whereby private individuals would be able to invest and earn an amount back depending on how much it has been invested. Last but not least, educating the retired generation on making sound financial investment decisions is key.
For more information kindly contact
Mrs Miriam Sultana
B.Com. (Hons)(Econ.)(Melit.) MSc (Environmental Economics)(Lond.)
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The Effects of a Decrease in VAT on the Food Industry in Malta
The tourism industry is one of the backbones of Malta’s economic growth. The industry generates multiple business activities on the island, generating thousands of employment opportunities. The industry creates demand from other parts of the economy, including food and beverage, manufacturing, agriculture, as well as the retail and wholesale sectors. Restaurant services play a key role in this sector, and recent media articles have commented on the fact that the VAT at 18% charged on restaurants in Malta is not helping to improve the competitiveness of the catering industry, especially the tourism sector.
At the moment, Malta charges 18% VAT on restaurant services and when comparing this to competing Mediterranean countries, such as Italy and Cyprus (at 10% and 9% respectively) this rate is perceived as being high. Stakeholder consultations revealed that the VAT rate coupled with other significant overheads is eroding the viability of the sector, making it unattractive for start-ups and causing problems to attract high quality employment. Indirectly, this is reducing the return on capital and naturally impacts negatively on the quality of services offered by restaurants, as well as the level of investment necessary by the sector. Furthermore, we understand that there tends to be an under-declaration of VAT by some players in a bid to reduce their underlying costs and justify the ever-increasing cost of capital and resources employed. This is giving rise to the so-called shadow economy.
Many are also of the opinion that the emerging phenomenon of private accommodation (such as Airbnb) and the use of home-chefs may cause a partial erosion of restaurant owners’ profit margins. Furthermore, a reduced rate of 7% charged on accommodation packages by hotels (including food and beverage consumed at hotels) is considered to be a concession which is not available to restaurants.
Using publicly available data from Eurostat and the National Statistics Office, this study examines the net economic impact that a decrease in VAT on restaurant services would have on economic growth. Through a regression analysis, our study confirms a priori expectations that a surge in household consumption positively generates an increase in VAT income receivable by the government. Furthermore, we also determined that whilst tourist arrivals does not seem to be a significant independent variable in our model, the importance to VAT income should not be undermined. This is because of the higher the number of tourist arrivals, the higher their expenditure on restaurants, and thus the higher the injections into the circular flow of income. This is evidenced by the latest study issued by the Malta Tourism Authority which shows that the highest proportion of expenditure by tourists (besides accommodation) is on food and beverage, with around €94 per capita being spent in restaurants.
Within this context, the government may wish to consider the introduction of a lower VAT rate, from 18% to 13% for an experimental period, say; two (2) to three (3) years, during which there would be a detailed empirical review of its net economic and social impacts. We justify this recommendation on the basis of similar evidence exhibited by previous studies and through various stakeholder consultations which highlight the challenges currently experienced by the sector. This is particularly important in view of the fact that the restaurant sector is an important contributor to Malta’s economic growth, and one which compliments the tourism industry and labour market.
Based on this hypothetical scenario, we moved on to estimate the multiplier effect on the economy arising from higher consumer expenditure following a potential drop in the VAT rate for restaurant food and beverage services from 18% to 13%. The multiplier provides a measure of the magnitude of changes in the output levels, income levels and value-added driven by an initial demand for goods or services. Under the assumption of perfect elasticity of demand, a decrease in VAT is expected to increase households’ disposable income, which would be spent on restaurant services (assuming that the reduction in VAT is fully passed on to consumers). This would constitute a displacement of government income for additional household consumption, as in reality, that portion of government income arising from VAT would have been re-injected into the economy in the form of government investment.
We also assume that local consumers’ marginal propensity to consume is equal to one, and no saving (out of the additional disposable income) would take place i.e. what is gained is actually spent in the form of higher demand for restaurants. Similarly, we also assume that the extra disposable income of tourists would be spent here in Malta on restaurant services, with no leakages occurring. Using multipliers for the accommodation and food service industry (Cassar, 2015), and it is estimated that this change is projected to bring about an increase of around €49 million in 2017 and €51 million in indirect and induced effects in the economy over 2016. This implies a net increase of around 0.56% in 2017 and 0.58% in 2018 over the real GDP of 2016.
If however, the reduction in VAT is not fully passed on to consumers, stakeholder consultations indicated that this measure is still expected to benefit the restaurant industry. Restaurant owners will be able to enjoy higher profit margins, which could in turn be used for operational expenditure, as well as other capital expenditure in decor and efficient kitchen equipment. Higher profit margins would also imply that restaurant owners would have more resources at their disposal to solve the problem of staff retention and enhance the attractiveness of the industry, whilst also improving the quality of their services offered. This would positively enhance the long-run sustainability of both the restaurant and the associated tourism industry.
For more information kindly contact
Mrs Miriam Sultana
B.Com. (Hons)(Econ.)(Melit.) MSc (Environmental Economics)(Lond.)
Email
Disclaimer
All matters raised in this report are only those which came to our attention and are not necessarily a comprehensive statement of all weaknesses and strengths, and potential risks and opportunities that exist. Though no complete guarantee can be given with regard to the advice and information contained therein, care has been taken to ensure that all the information provided in this report is accurate as possible, enabling us to provide a reasonable representation of the sector. The report is prepared solely for the exclusive use of its recipient/s as indicated in the covering letter accompanying the report, and otherwise the report should not be quoted or referred to in whole or in part without our prior consent.
No responsibility to any third party is accepted as the report has not been prepared, and is not intended for any other purpose. PKF Malta is a member firm of PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.