review of the maltese pension system: understanding the challenge pensions strategy group june 2015

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 (%)


….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


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


%

Now 2060100

120

140

160

180

200

173

145

187

Number in employment


000s


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


• 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

review of the maltese pension system: understanding the challenge pensions strategy group june 2015

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