Sunday, 1 May 2005

Pensions - Getting on with it

The Malta Independent on Sunday 


  Each morning as I walk from the Floriana car park to Valletta, after negotiating my life with a handful of bus drivers, I say a little prayer of thanksgiving as soon as I reach City Gate Bridge.

I keep looking firmly straight ahead in order to avoid the bazaar scene on each side of Valletta entrance, a cheap scene totally unbecoming of the grandiosity of the city that awaits beyond the gate.

Once inside Valletta proper my thoughts land on the two edifices right in front of me where Republic Street starts.` On my right there are the war destructed remains of the main Opera Theatre, a site now serving only as a derelict car-park. On my left there is an the impressive architecture of Palazzo Ferreria that houses the Ministry for the Family and Social Solidarity, charged amongst other things with the administration and safeguarding of our national pension system.

And I reflect with trepidation. It has taken us sixty years since the end of the Second World War, sixty years of think and talk about how best to restore the Theatre site to respect its former glory. Yet we have absolutely nothing to show for it but a derelict car park that insults the status of such a grand city. We have not even brought ourselves to do something temporary, more respectful of the status of our capital city, whilst continuing to deliberate on the long-term use of the site . The least we can do is roof over the remains by means of a soft space-frame structure, call the place by its true name i.e. the remains of the Royal Opera Theatre, and open an exhibition on a fee paying basis with images and replicas detailing the history of the theatre itself set in the context of Malta`s pivotal role for turning the fortunes of the second world war from the Axis to the Allies.

And as I set my sight on Palazzo Ferreria I wonder. Would it take us sixty years of useless talk about our pension system and yet do nothing about it` If we do our pension system would be as derelict as the opposite Theatre site.

In recent days we have had proposals from civil society organizations giving their views on the shape that pension reform should take. Regretfully some of these reports` are not worth the paper they are written upon. Proposals to keep the retirement age at 61 years avoids the reality that people are now ling well past 80 years meaning that if the pension age is kept at 61 the system will have to sustain more than 20 years of pension payments which can only be done through a sizeable increase in contributions by those actively employed to maintain the sustainability of the current Pay AS You Go system. Suggestions to increase the pensionable age to 65 but to exclude teachers from such extension would introduce a precedent where the exception becomes the rule.

It is time to draw conclusions and act on the Pension reform. Further discussions are not adding value. Most are purely putting in views that defend sectorial interest rather that address the issue on a holistic basis.

There are three points about which there seems to be wide enough agreement for government to translate them into some sort of an action plan.

Firstly there is general agreement that the current Pay as You Go first pillar system is unsustainable in its present format, even though the benefits from it are inadequate to safeguard comparable standard of living during retirement. To restore sustainability of the system government has to introduce a mix of measures which has to incorporate the following:

Making benefits directly related to the overall level of contributions and not just the contributions paid in the last time period. Extending retirement age gradually Relaxing the caps on the maximum contribution and the maximum pension but keeping relativity between the two on the pretext that if not, contributions without corresponding benefits become taxes.

Secondly there is enough evidence that the introduction of a compulsory second pillar would do more harm than good and should be abandoned.` Introduction of a compulsory second pillar would substantially dent the spending power of those on fixed incomes causing both hardship and pressure on employers to adjust wages.` This could lead to an increase in our cost base when our international competitiveness is already under pressure.` After all most of our working population has already elected, perhaps unconsciously, to have an automatic second pillar pension by servicing a mortgage on their residence.

By retirement age this mortgage would have been paid and the residence would be the best investment they cold ever have made. Given the wide culture of home ownership what we need is to develop financial structures giving retirees the opportunity to release equity gradually from their residences to generate additional revenue streams during retirement without giving up the comfort of continuing to live where they prefer.` The markets can take care of this without costly incentives if government sets up the necessary legal and administrative structures.

Thirdly government has to decide what fiscal incentives it can afford on a long term basis to motivate current workforce to enter, on a voluntary basis, into private pension schemes that are properly licensed and regulated. Without fiscal incentives there will be little spur for current workforce to lock their savings into private pension plans rather than continue to water their insatiable consumption causing long-term problems on the available of savings to finance our continued economic development without having to resort to external borrowing.

Three points about which government has all the studies it wants, all the information it desires and all the views of civil society. It is now time to act on these three points whilst continuing to deliberate on other long term measures to render our pension system more equitable, adequate and sustainable. Those in charge at Palazzo Ferreria can look out from their windows and see what fossilised inaction can do to grandiose edifices.

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