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REVIEW OF THE MALTESE PENSION SYSTEM: UNDERSTANDING THE
CHALLENGE
Pensions Strategy Group
June 2015
Outline• The 2007 Pension Reform and Recent Trends
• The Demographic Element: Recent developments and projections
• Understanding the Challenge
THE 2007 PENSION REFORM AND RECENT TRENDS
Pension Expenditure on a rising trend over past decade…
2003 2004 2005 2006 2007 2008 2009 2010 2011 20127.8
8.0
8.2
8.4
8.6
8.8
9.0
9.2
9.4
9.6
9.8
Pension Expenditure as a % of GDP
Source: Eurostat
Yet, the expenditure ratio remains below the EU average….
IE LT EE LV SK BG RO CY HU MT LU CZ HR PL SI SE ES DE UK BE FI EU NL EA DK PT AT FR IT EL0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Pension Expenditure as a % of GDP (2012)
Source: ESSPROS, Eurostat
Nevertheless, the welfare gap remains substantial….
Source: NSO
Expenditure Social Security Contributions0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Social Security Revenue and Expenditure in 2013 (as a % of GDP)
Contributory Non-Contributory State Contribution
Main Elements of the 2007 ReformMain Measures Born before 1
January 19521952-1961 Born on and
after 1 January 1962
Rise in Pension Age 60\61 yearsFemales\Males
Gradual increase from 62-64 years
65 years
Pension Formula Best 3 years of last 10 years
Best 3 years of last 11-14 years
Best 10 years of last 40 years
Lengthening of the contribution period
30 years 35 years 40 years
Indexation of the Maximum Pensionable Income
COLA COLA 70% Wage growth & 30% Inflation
Minimum Pension Linked to Minimum Wage
Linked to Minimum Wage
Linked to Median Income
PensionIndexation
Collective agreements & COLA
Collective agreements & COLA
70% Wage growth & 30% Inflation
Observations on the 2007 Reform
• Besides reversing overall drop in generosity, 2007 reform included measures to help certain groups, such as the introduction of child rearing credit, better survivors’ benefits and the Guaranteed Minimum Pension.
• The more generous indexation of the maximum pensionable income was to be financed by an increase in spending, an effective increase in contribution revenue and an increase in the pension age to 65.
Now 20600
10
20
30
40
50
60
55
18
44
Average replacement rate
Pre- 2007 reformCurrent rules
% o
f p
reci
ou
s in
com
e
The Current Situation: Adequacy
Malta EU0
5
10
15
20
25
30
27
26
2118
% of 65+ in relative poverty and/or social exclusion
2005 2013
Malta Euro area0
10
20
30
40
50
60
47 5146 56
Median pension as % of Median wage
2005 2013
The Current Situation: Sustainability
2004 Malta
2012 Malta
2004 EU
2012 EU
0
2
4
6
8
10
12
14
3.5 2.7
5.8 6.1
8.8 9.6
12.213.3
% of GDP spent on pensions and paid in contributions by employees
Employee contributionsPensions
2004 Malta
2014 Malta
2004 EU
2014 EU
0
10
20
30
40
50
60
70
31.537.7 40.6
51.8
54.0
62.3 62.9 64.9
Employment rate % overall and of older workers
55-64 Overall
THE DEMOGRAPHIC ELEMENT: RECENT DEVELOPMENTS AND PROJECTIONS
The Old-Age Dependency Ratio has been on the rise since the 80’s….
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
Old-Age Dependency Ratio [65+/(15-64)]
Source: Eurostat
Focusing on the economically active population, the ratio for Malta is close to the EU average
IE CY LU SK PL NL CZ UK EE RO AT SE DK SI LV LT MT FI EU DE HU BE FR PT BG ES HR IT GR0
10
20
30
40
50
60
70
Effective Economic Old Age Dependency Ratio (2013)
Source: The 2015 Ageing Report Underlying Assumptions and Projection Methodology;
Demographic Projections• The demographic projections are based on the
EUROPOP 2013 exercise by Eurostat;• Exercise assumes a process of (partial) convergence in
the fertility rates across Member States to that of the forerunners over the very long-term. Expected to reach 1.78 for Malta by 2060.
• Life expectancy at birth is projected to increase by 6.4 years from males and 6.3 years for females over period 2013-2060
• Net migration for Malta projected to average around 1,400 over the period 2013-2060.
Total population to reach 476,000 by end of 2060...
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060250,000
300,000
350,000
400,000
450,000
500,000
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
EUROPOP2013 Population
Source: The 2015 Ageing Report Underlying Assumptions and Projection Methodology; Eurostat
with the number of older dependents expected to continue rising
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 20600%
10%
20%
30%
40%
50%
60%
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Old-Age Dependency Ratio [65+/(15-64)]
EUROPOP2013 Old-Age Dependency Ratio
Source: 1960-1970 Central Office of Statistics, Malta; 1980-2060 Eurostat
Share of persons aged 15-64 will become smaller relative to 65+
2060
0-45-9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84
85+
10 8 6 4 2 0 2 4 6 8 10
Males Females
Source: Eurostat
The OADR will exceed the EU average by 2060
IE LU NO BE SE DK UK FR FI LT CY NL CZ EU LV AT MT RO HR SI HU IT ES EE BG DE EL PL PT SK0
10
20
30
40
50
60
70
Old-Age Dependency Ratio in 2060 (%)
Source: The 2015 Ageing Report Underlying Assumptions and Projection Methodology; Eurostat
….with the Effective Support ratio declining from 2.0 to 1.4 by 2060
2013 20600.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
3.9
2.0
2.4
1.4
Support Ratios
Potential Support Ratio Effective Support Ratio
Source: The 2015 Ageing Report Underlying Assumptions and Projection Methodology; Eurostat
UNDERSTANDING THE CHALLENGE
Understanding the Challenge
Now 20600
10
20
30
40
50
60
25
55 51
Old age dependency ratio
Europop 2010 Europop 2013
%
Now 206050
55
60
65
70
75
80
65 7075
Participation rate
Ageing 2009 Ageing 2015
%
Now 20600.0
0.5
1.0
1.5
2.0
1.7
0.9
1.4
Potential growth rate
Ageing 2009 Ageing 2015
%
Now 2060100
120
140
160
180
200
173
145
187
Number in employment
Ageing 2009 Ageing 2015
000s
Understanding the Challenge
Now AGR15 2040
AGR15 2060
0
4
8
12
5.3 6.710.3
9.6 9.712.8
Pension spending (Malta)
Old age Other
% o
f G
DP
Now at 65 In 2060 at 6705
1015202530
17.7 20.720.7 23.7
Life expectancy at pension age (EU)
Men Women
Yea
rs
Now at 61/60 In 2060 at 6505
1015202530
20.8 22.425.3 25.7
Life expectancy at pension age (Malta)
Men Women
Yea
rs
Now AGR15 2040
AGR15 2060
0
5
10
15
8.5 9.3 8.9
11.3 11.7 11.1
Pension spending (EU)
Old age Other
% o
f G
DP
Revised Pension Spending Projections
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053
2055
2057
2059
-5%
0%
5%
10%
15%
20%
0.2%
-4.8%
8.6%
12.5%
8.8%
15.1%
System deficit (New Baseline) Spending (New Baseline)Spending (PSG 2010 Baseline)
Revised Adequacy Projections
PSG 2010 Baseline New Baseline0
10
20
30
40
50
60
54.6 51.4
45.050.5
Average Pension Replacement Rate (%)
Now 2060
Understanding the Challenge
• Elderly poverty rate in Malta is higher than the Euro area.
• Generosity of public pension set to decline by one eighth for future pensioners. Indications that private saving has declined over time.
• Currently period spent in receipt of state pensions is high compared to EU, while career lengths (32 as against 35) and contribution rates are smaller. In the future, period in retirement closer to EU if people retire at 65, but contribution period could remain relatively low.
• The Maltese state faces significant challenges to finance health and long-term care. Increase in these areas nearly as high as pensions.
• Pension system balance is stable up to around 2040, deteriorating progressively thereafter. Hence the need to revisit the pension parameters for persons born after 1 January 1962 with a view to strengthen financial sustainability whilst safeguarding the adequacy of their pensions.
THANK YOU