Selected economic aspects of pension reform in Malta

Abstract

In this thesis it was clearly discussed that Malta's Pension system needs reform as it suffers from both issues of fiscal non-sustainability and low pensions in the long run. The Government had to consider the fiscal issues, the social aspects, labour competitiveness issues, as well as institutional design in coming to a decision of how to reform the pension system in Malta. The financial sustainability of the pensions system will be impaired effecting both recent pensioners and future generations as the demographic replacement ratio will not allow for the sufficient collection of contributions to meet the benefits promised to individuals under the current pensions system. This dissertation highlighted a number of risks to financial stability that may occur due to ageing itself, with pension reform, and notably when there is a continued reliance on unsustainable pay-as-you-go (PA YG) pension systems. These all require vigilance by central banks, and may require sterilised liquidity assistance or even adjustments in interest rate policy. There are also challenges for counter-inflation policy during the ageing process, as at different points it may generate deflationary and inflationary pressures, while a fiscal crisis would have major repercussions for monetary stability. The transmission process of monetary policy will also enter a state of flux with ageing, although arguably this may be sufficiently gradual to allow central banks time to adapt. Furthermore this paper gives a description of the current and reformed pension systems in other countries. World Bank has recently suggested that the existing PAYG pension systems in many rich as well as poor countries, should be replaced by fully funded, mandatory, preferably private pensions, as the main pillars of the new system. It argues that these reforms will not only benefit the pensioners, but also enhance savings, promote capital formation and economic development. Finally, one finds an analysis of selected Maltese Social Partners thoughts about the pension system and the recommendations proposed.