The Two Sides of the Pensions Problem

The Malta Independent 

  
The so called pensions problem can be simply split into two parts. The first is how we are going to maintain the existing system when it is clear that unless the parameters are re-aligned, the changing ratio of beneficiaries to contributors, as a result of demographic changes and longevity beyond retirement, will break the financial structure of the National Insurance scheme.

The second is that even if we find ways and means of re-aligning the parameters to make the current system sustainable under the changing demographic pressure, it is insufficient even at its maximum to maintain the standard of living of a growing segment who earn much more than the maximum pensionable salary.

Several reports have been written about the former, the latest by the World Bank, which indicate how the various parameters could be re-aligned to keep the present system sustainable. Foremost among these is the extension of retirement age from the present 61 years to at least 65 years, and alignment of benefits to the actual quantum of contributions made, rather the present mechanism which makes a very loose link between the overall level of contributions and the benefits entitlement.

Sooner or later, when government finds the conviction to manage the necessary change even at the expense of some electoral unpopularity, or when the system approaches its breaking point, we will have to do what we have to do, whether we like it or not.

Regarding the latter there are proposals for the introduction of an additional funded pillar which for those still under age 50 could contribute to increasing the maximum level of pension to ensure an adequacy of retirement income.

I have my doubts how necessary this really is. If we force people to save further for their supplementary pension we could create pressure for wage increases which could further complicate our international competitiveness. Furthermore, if government has to give fiscal incentives to stimulate the adoption of this funded pillar, it could compound its fiscal position at a time when its focus should be on re-sanitisation of the fiscal system.

My doubts were confirmed this week when the NSO issued statistics about home-ownership in Malta. It is indeed heartening that 77.6 per cent of Maltese households own their residence and 11 per cent have an additional property. Upon retirement, all these will be the owners of their debt-free residence which probably is the best inflation-proof investment they can make.

So we can hardly argue that the Maltese are not saving for their pension and they need to save more. If there is anything which has so far shielded the country from financial disaster caused by recurrent strategic public fiscal deficit it is the thrift culture which has facilitated the financing of such deficits to the point that it made it possible to avoid taking timely curative measures.

So the solution to the problem of pensions insufficient to maintain the life-style of the work years should be found in devising systems of generating supplementary cash flow by residence equity release over the period of retirement.

The state system cannot guarantee sufficiency of pensions to maintain working-years living standards. This will unavoidably lead to a dilution of heart-warming notions of leaving one’s residence to one’s children to be replaced by the reality that one needs the savings made through paying a mortgage during working life to enjoy a comfortable and healthy retirement. In any event, with life expectancy at retirement exceeding 80 years, there is little scope for leaving a house to the children when they themselves will be nearly at pension age before they inherit it.

To address the second part of the pension problem, what we need is a stable monetary system with long-term low interest rates to make it easier to service a mortgage. Many people forget that local mortgages are on a variable rate basis and that the current low interest rate scenario may not last forever.