24 August 2005

The Web

The great juggling act

A White Paper was issued on the 24 November, 2004. It was styled ‘Pensions –Adequate and Sustainable” and provided a comprehensive overview of the issues and concerns of the current pension system and suggests bold recommendations for reform.
Quoting David Spiteri Gingell, chair of the working group, it is a framework allowing for a wider consultation process so that everybody can contribute to a pensions system whose implementation must be introduced by 2007. Naturally all this depends on our incessant ability to balance national budgets. Unless there is a concerted effort to regenerate more productivity the welfare gap will continue to mutate into an abyss of millions.
Excessive public spending has been repeatedly called the root of all evil when it comes to deficit bashing. National debt reached 76 per cent of GDP and its servicing cost alone exceeds the health budget. Not all is gloom and doom and a slashing effort has been taking place following the submission of our convergence plan last year. Fifteen years of progressive annual deficits cannot be slashed overnight.
The European Commission recently lauded government for keeping on track to correct the excessive deficit. The target date to reduce the deficit below three percent is planned for next year. But will this be at the cost of not fully implementing crucial structural reforms in the pension and a migratory health plan at Mater Dei hospital?
Cost cutting seems to be the order of the day and profligacy joined the dictionary as a dirty word. It is significant and most welcome that the Gonzi administration is taking the bull by the horns. We all wish him well and augur that the uphill climb can be successful. A lot depends on this. It goes without saying that there are risks with regard to the long-term sustainability of public finances and principally reaching a positive balance on the welfare fund within the 2006 budget. This does not come easy given the escalating cost of a health service to an aging population. Government expects to end the year with a deficit of Lm19.4 m in the welfare account, down on the Lm21.3m registered last year. Expenditure on medicines and other health costs shot up from Lm55.6m to Lm63m reflecting the constant price increases and unbridled consumption. We know that government has arrears amounting to Lm8m owed to local agents of pharmaceuticals. Collectively they are suing for their dues while government is expecting to be granted an extended credit period of 180 days to settle arrears. In the meantime, two years ago John Dalli (the ex-minister of finance) had announced in the 2004 budget speech (2003) that the 20 per cent hike in vat will go exclusively to finance the health sector which will be incorporated into a ring fenced health fund. The Treasury work in mysterious ways and two years down the line we are still waiting for this mechanism to be put into place although a new Health Services Act seems to be in the offing. Hopefully this will replace redundant legislation going back to the 1930’s. According to Dr Gonzi “it is government’s intention to set up this health fund as planned.” The reason for the introduction of a Health Fund as originally conceived in Mr Dalli’s budget speech was to have ear-marked resources that are directly related to health expenditure. This will alleviate the financial pressures exacerbating the current deficit on the pension account.
Definitely any efficacious pension reform costs millions and can only be financed out of future growth. No prize for guessing why the Malta Employers Association has been insisting that the number of employees in the public sector needs to be reduced.
Now the pre-budget document suggests that surplus labour will be regrouped in a pool and re-trained. Possibly this idle human resource can be absorbed by the private sector. In turn, the private sector needs to get the necessary fiscal incentives and industrial infrastructure to employ more people. While exports for 2005 are down we note that employers are frowning at the onslaught of additional taxes and the possibility of higher pension contributions. Employers retort that the country can only have an enhanced pension system if national productivity improves and in turn more wealth is generated.
On a positive mood the minister of finance is predicting that economic growth is expected to accelerate further to reach 2.2 per cent in 2007. This is less than half of what is needed to rekindle the kind of feel good factor that was prevalent in the early nineties when 5 to 6 per cent growth rates were the norm. But the impossible we do now while miracles have to wait.
Ideally economic growth rates need to supersede the current three per cent inflation rate for us to generate real growth and help create a properly funded pension scheme. The Association of pensioners have been vocal to point out that there is a mismatch in our aspirations for a sustainable future .While party apologists belie the urgency of the crisis, pragmatists reply that it is foolish to keep our head in the sand while the storm warning signs are staring us in the face. Who is right in this endless paradox?
The answer is given by Social Solidarity minister Ms Cristina. She has been reported to warn about Malta's aging population - the elderly cohort is expected to double in 50 years' time - and this combined with a falling birth rate, the current system where workers pay for pensioners would not be sustainable in the long run.
Not surprisingly, the Association of pensioners say that Maltese pensions are in a sorry state. Pensions for the post-war baby boom generation, soon to move into retirement, are looking increasingly insecure.
Prospects for later generations are only a little better and this happens only if the reform suggested in the White paper is rigorously implemented. The problem is worst for women, whose longer lives and interrupted careers mean lower savings and a greater threat of poverty in later life.
To be fair one needs to mention that various committees were piloted by governments since 1987 to study and recommend remedies. To start with we meet a trilogy of reforms in the current White Paper. The usual rhetoric is not missing and we find three wishes starting with the obvious one that the economy must engage the productive capacity of all and provide everyone with a decent sustenance. Furthermore, the White Paper boldly announces that a second pillar in the revamped pension scheme will be introduced to increase one’s pension income and enhance one’s standard of living. This will be mandatory for employees and self-employed. But who is going to foot the bill at a time when the economy has registered negative growth?
An innovation is the fiscal concession that is linked with the workings of the second pillar. The annual contributions to this scheme will not be taxed on an annual basis but a maximum tax, established at a fixed percentage rate, should be paid upon the maturity of the scheme. The White Paper recommends that the annual contributions into an SPPS should not be taxed on an annual basis. A maximum tax, established at a fixed percentage rate, should be paid upon the maturity of the Scheme. __The annual contribution to the fund should be non-taxed up to a capped limit. The income derived on the maturity of the scheme will be subject to income tax based on the individual’s FSS rate._
The statutory retirement age of 65 years will become mandatory for both men and women.__
Having seen the overview of the Paper can we compare and contrast it with the White Paper issued in 2003 by the British government? It certainly pays to learn from the mistakes of others. In fact one of the most striking aspects of the British White Paper is the admission by the UK Government that occupational pensions, traditionally a source of strength in the UK pensions partnership, face particular pressures that require early action.
The bulk of the changes in the British pension arena are to be introduced this year. It is interesting to note that the reforms centre around the two key aims of achieving greater protection for members and a reduction of costs for employers. Paradoxically, one notes that the British Government has already announced it will make available GBP400 million of public money to provide assistance to people who have lost their pensions due to their final-salary pension scheme being wound up as under funded, prior to the introduction of the Pension Protection Fund. The PPF is intended as a safety net for any schemes that go bust.
Can we afford to do the same and offer incentives for workers to invest in pension schemes and should, presumably keep the second pillar schemes tax-free. Change is now inevitable and disaffected pensioners have been heard complaining that their standard of living is falling behind. Will the finance minister succeed in juggling the figures in time for the 2006 budget? Let us all hope that the juggler ends his act with a smile.
The author is a partner in PKFMALTA ,an audit and business advisory firm.

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