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 Helping oneself: Private pension schemes, along with state benefits, would allow the elderly to enjoy "multi-tier pensions".

 

Dalli proposes mix of private, state pensions 

By Jesmond Bonello, timesofmalta.com

October 15, 2003 

Finance Minister John Dalli yesterday gave a clear indication of the government's direction on pensions, saying the solution had to involve a hybrid between the present pay-as-you-go system and a funded scheme.

In addition to a government safety net, Mr Dalli said there should also be funded private pensions, which could take the form of service pensions by employers in conjunction with their employees, and private pensions drawn by individuals in their personal capacity.

If this were implemented, Mr Dalli said, the government would be turning the concept of the 1979 pensions regime on its head.

"We will be doing away with the principle that the national insurance pension should be the maximum (if not the only) pension that one could have. We will be facilitating the practice of individuals enjoying multi-tier pensions flows that will accumulate."

The finance minister was addressing a seminar on pensions organised by the ministry and department for social policy and the European Commission.

He said the government was hoping that the debate within the welfare committee and, subsequently, the Malta Council for Economic and Social Development would be objective and clear and that all partners around the table would seek the common good.

"We are not for quick fixes or compromises that result in ineffective palliatives. What we are doing is not to rush to find a plug to fix the deficit problem. We are seeking to anchor our pension system in a strong, viable base in the long term."

He made it clear the country was still in time for reform: "Our population is still younger than the populations in what is now the European Union. This presents us with options that are not available to others and with an implementation time frame that puts our change trend line at a much lower gradient than that of other countries.

"While in Europe expenditure on pensions accounted for 12.7 per cent of GDP in 1999, ours was only 4.5 per cent. This increased to 4.8 per cent in 2002 and will continue to increase in time."

He said almost 53 per cent of expenditure on social security benefits was attributable to retirement pensions in 1999. In 2002, this portion increased to 54.11 per cent. Total expenditure by the government and non-profit institutions on old age amounted to 7.6 per cent in 1999, creeping up to 7.9 per cent in 2002.

"Although the problem of sustainability of pensions has not reached EU proportions, it is escalating steadily and it is projected that while today we have about five persons of working age for every pensioner in 2025 there will only be around three persons of working age to support each pensioner."

Mr Dalli stressed that the government wanted a safety net for Maltese citizens: "Official statistics clearly show the importance of our transfer system and the fact that if this was not in place the proportion of households at risk of poverty would double. We are determined to sustain the social safety net for our population. We must work hard to transform it into a sustainable system. Anybody who shies away from this important task is not only abdicating his social responsibility but, through his indifference or antagonism, he will be militating in favour of the collapse of our social systems."

Ideally, Mr Dalli admitted, pension structures should be based on a funded concept. "However, this option is extremely costly for Malta as it results in the diversion of revenue through social security contributions away from the government budget that at the same time will retain the full burden of all pensions outflows. This creates an unsustainable surge in deficits and debt. This not to mention the billions of liri required if one thinks about actuarially funding the present pensions liability and contingencies".

He said the solution for Malta had to be a hybrid between the present pay-as-you-go system and a funded scheme.

"We see the government maintaining a pay-as-you-go safety net that covers all Maltese citizens and which is funded by compulsory contributions by all. This will be run by the government on pretty much the same lines as the present system with adjustments to the key parameters and that would render the system actuarially sensible and viable."

Mr Dalli said these parameters were:

The retirement age which, in turn, determines the length of the working life and, therefore, the amount of contributions paid by each potential pensioner. It also determines the length of the personable time frame and, therefore, the level of the pension liability.

The calculation of the actual pension paid annually, in turn determined by the income taken into account, the level of the income and contribution cap and the number of years used to work out the average on which the income base is then determined.

The method of indexation chosen to maintain as much as possible the purchasing power of the pensions in the pensionable period.

The level of contribution to be made by all those in the working age bracket. "This naturally is a result of the decisions taken on the other three parameters."


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