Twelve years after the launch of the White Paper on pensions reform, Malta’s pension landscape remains an anomalous one when compared to other EU Member States and advanced economies elsewhere. Malta continues to be one of the few (if not only) jurisdictions where persons do not have the possibility – mandatoryily or volunatarily – to become members of a work place pension. Indeed, despite the fact that the 2004 Whitepaper made it clear that a first pension income on its own will never bridge the gap between income earned in employment and the desired quality of life in retirement, it is only in 2015 that a third pension instrument was locally introduced.
It is important that one is specific: the cohort of persons that are affected if they do not bridge income earned in employment and a desired quality of life in retirement are persons in the middle income group. Why is this so?
The social security pension, when introduced in 1979, benchmarked the 2/3 pension to the salary of the President of Malta – which at the time stood at Lm6,000 (€13,980). The salary of the President of Malta today stands at €56,310. The social security pension is not calculated on the full salary. The maximum contribution paid, that is the 10 per cent paid by an employer, employee and Government if one is an employee, is paid on what is called the Maximum Pensionable Income (MPI). If the social security pension system worked as originally planned, the MPI would be €37,560 (with the maximum contribution paid €3,756) – that is 2/3 or 66.67 per cent of the salary of the President.
The MPI today however, is only €17,984 (for those persons born between 1952 and 1961 and who will retire between 2017 and 2025) – that is 46.88 per cent of what the MPI should be, if the relationship between the 2/3 pension and the salary of the President of Malta was maintained. Why was this not maintained?
The reason is that different administrations between 1979 and 2004 marginally adjusted the MPI – from €13,980 to Lm6,950 (€16,194) over a 25 year period. Thereafter it was adjusted by COLA – which reflects retail and not wage inflation. In the intermin, as wages increased and the MPI was rendered static over 25 years, the relationship between the maximum pensionable income and the average salary, let alone the salary of the President, deteriorated – significantly.
One of the objectives of the reforms carried out since 2004 was to reverse the continued degeneration of the Average Pension Replacement Rate (APPR) – that is the pension income value vis-à-vis the average wage. The APPR for current pensioners is, today, approximately 54 per cent. Without the reforms, that of future pensioners was seen to collapse to 16 per cent – and following the reforms this is now maintained at 47 per cent of the average wage.
Quoting the APPR is somewhat misleading – as it averages the pension replacement rate in its relationship to the average wage across different income groups. When income groups are assessed individually, one finds that the pension replacement rate for low income groups is approximately 80 per cent of the average wage. The pension replacement rate of persons in the middle income group, however, is 37 per cent. For the high income group, the pension is mere additional income.
How does this affect the middle income group in real terms? Let us take as an example, a person who earns €30,000 annually, and is to retire on 31st December 2016. Malta continues to apply age discriminate employment legislation. This means that this person must resign when they reach their retirement age unless the employer invites them to continue or find alternative employment elsewhere. On 1st January 2017, this person will see their income fall drastically. Assuming that the social security contributions qualifies them for the maximum pension, this person’s income will fall to €11,995. This is worked out as follows:
2/3 x €17,984 (MPI)=€11,995
Overnight, literally, the person if they are depending on the social security pension as their primary source of income during retirement, will have to adjust their lifestyle from one based on an annual income of €30,000 to one based on €11,995 – that is 39.98 per cent of the employment income earned at one minute to midnight on 31st December 2016 [this example assumes that this person qualifies for the full pension. The average value of pension income is €8,060].
Additionally: middle income pensioners in Malta are subject to a double taxation whammy. Taxation is paid on the social security contribution paid whilst in employment as well as on one’s pension income if this is higher than €9,000 annually.
Advances in medicine and technology mean that a person who today retires at 62, 63 or 64 years of age are the 50 or so of a generation ago: healthy, outgoing, etc. The above clearly shows that a person in the middle income group who plans their quality of life during retirement primarily on the social security pension are either in for a very unpleasant surprise or will have no choice but to drastically alter their lifestyle during retirement.