Will EU inroads foster greater social security?

In 2006, Malta continued its inroads within the EU, with reforms in legislation aimed at adopting EU directives and reaching EU targets. Still, women face disadvantages to build an adequate pension and the new social security scheme may lower pension payments. Meanwhile, Malta claims to devote 0.15% of its GNI to ‘development aid’, although how much of this money actually goes towards its stated goal is highly questioned.

Advancesin gender equality

The legislative framework for gender equality improved considerably in Malta onjoining the EU in 2004. Malta is continuously updating its own legislation inline with existing European Community legislation on equal gender treatment inthe areas of employment and social solidarity. The employment rate among womenregistered a slight increase (one percentage point) between 2000 and 2005. Thereis still a large gap between women (33.7%) and men (73.8%) in the rate ofemployment. The employment rate for older women is 12.4% compared to 50.8% formen. The rate of employment for women between the ages of 20 and 49 falls by 8.9percentage points when they have a child, while that of men increases by 4.4percentage points. Around one fifth of working women (21.8%) work part-time, ascompared to only 4.5% of working men. Malta has the widest gender imbalance inthe EU regarding political decision making, with women holding only 9% of seatsin parliament, while in the economic sphere, women account for only 17.7% ofmanagerial positions. However, Malta tops all EU countries as the leastinequitable with regard to the gender pay gap (4%). Women also represent themajority of new higher education graduates (57%), although this fact is not yetreflected in the different spheres of society. At the social level, women –and especially elderly women and single mothers – are at a greater risk ofexclusion and poverty (Eurostat, 2006).


Poverty and social exclusion

The at-risk-of-poverty rate for 2004 stood at 15.5% among women (compared to anEU average of 20%) and 14.2% among men (EU average 15%). Children (21.9%) andthe elderly (16.5%) are the population categories at highest risk of poverty.When analyzing poverty by household type, single-parent households (which aremainly headed by women) account for the highest percentage (47.9%) (NSO, 2007b).Half of the unemployed fell under the poverty line, in contrast to 5.5% of theworking population. Most of the unemployed under the poverty line were male(53.7%). The ratio between the highest and lowest equivalized income quintileswas estimated at 4:1. The overall poverty rate in Malta (14.9%) is 1.1percentage points lower than the EU average (16%) (Eurostat, 2007, figuresfor 2004).


Pension reform based on EU policy

Malta, like other developed countries, is facing an ageing population. Due tothe effects of demographic trends on economic and social policies, a bill toamend the Social Security Act was presented to Parliament in July 2006 andbecame an Act on 1 January 2007 (Malta Parliament, 2006). The Act introduced anew pension system that responds to the need to provide for adequate andsustainable pensions in view of future trends. The new system is built on the EUpolicy (European Commission, 2003)to improve incentives for older workers to remain longer in the labour market,to strengthen the link between contributions and benefits, and to increasepublic and private funding, in light of the long-term implications of increasedlife expectancy on pension expenditures.

The government adopted a White Paper on a pension reform strategy in November2004 and asked social partners and other interested parties to provide feedbackand submit proposals. A multidisciplinary team was created to form the PensionWorking Group (2005), which assessed the feedback received and presented itsfinal recommendations to the government in 2005. That same year, the Ministryfor the Family and Social Solidarity (2005), in collaboration with otherconcerned ministries, released the NationalReport on Strategies for Social Protection and Social Inclusion, which included a section on pension reform.

The old contributory social security system, introduced in 1956, catered for oldage pensions and survivors’ pensions. In 1965 the system was expanded toinclude disability pensions. In 1979 a mandatory earnings-related pension schemethat covered old age pensions and survivors’ pensions was also introduced. Itis called the ‘two-thirds pension’ because the initial benefits uponretirement were calculated as two thirds of the average income during thehighest-earning three years of the previous 10 years, after a contributionperiod of 30 years. The retirement age was 60 for women and 61 for men. Thelower the number of years of contributions, the lower the pension disbursed, andat least 10 years of contributions were required to be entitled for such apension.


From a benefit scheme to a contribution scheme

The new pension reform gradually increases the retirement age from 60 and 61years to 65 years for both genders. Workers will have to contribute to thescheme for 40 years in order to qualify for the full two-thirds pension, whichwill now be based on the average salary during the highest-earning 10 of those40 years. The old system capped at a maximum pensionable income (MPI) of EUR15,525 (USD 21,475).The new system raises the amount in accordance with the increase in the cost ofliving adjustment until 2010. By 2014, the MPI will be gradually increased toEUR 20,700 (USD 28,630), and social security contributions will be adjusted inline with this new MPI. After 2014, revision adjustments will be weighted 70% onwage indexation and 30% on inflation. Currently, the national minimum pension isequivalent to four fifths of the national minimum wage for married people andtwo thirds of the national minimum wage for single people. For people born on orafter 1 January 1962, the guaranteed national minimum pension will be equivalentto 60% of the median national income.

A clause was also introduced through which persons over 61 years of age who wereborn on or after 1 January 1962 and have 40 years of credited contributions canopt for early retirement and start collecting a pension, as long as they do notresume paid employment before reaching 65. In addition, the Act established thecrediting of contributions for parents (including adoptive parents) who wereborn on or after 1 January 1962, who have the legal care and custody of childrenless than six years old (or 10 years in the case of severely disabled children),and have stopped work to take care of their children. This provision applies toboth mothers and fathers, who can claim the crediting of contributions for up totwo years per child (four in the case of disabled children). The new Act alsogives one year credit for students and workers who want to further theireducation and skills. Meanwhile, people working on a part-time basis can begranted the reduction of the minimum national insurance contribution to onetenth of their weekly earnings.

The new scheme mentions the introduction of a second pillar private pension at alater date, and a third pillar pension which is to remain totally on a voluntarybasis. The second pillar will be built by directing a percentage of socialservices contributions to be invested through a retirement fund handled byprofessional fund managers. The government plans to introduce the second pillarscheme at the ‘opportune’ time, depending on the economic climate, so as notto impose heavier burdens on workers and employers.

The new pension scheme maintains the pay-as-you-go nature of the existingpension system, but has made substantial changes to the accrual of pensionentitlements, the age at which benefits can be drawn, and the contributionperiods required. Essentially, there has been a shift from a defined benefitpension scheme to a defined contribution scheme, which in turn shifts more riskstowards the individuals concerned and results in a more restricted distributionto lower income earners and women.


Women disadvantaged to build an adequate pension

In principle, the new pension system gives everyone the same possibilities ofbuilding an adequate pension. In Maltese society, however, many women stilldevote more time to unpaid work and less time to paid work than men, whichresults in lower average pensions for women. The trend is for women’s careerpatterns to be shaped by their care obligations towards the family. Statisticsshow that the most common reason for women to be unemployed is due to personalor family responsibilities (44%) (NSO, 2007a). The 2005 employment rate forwomen, 34.9%, is considerably below the Lisbon Strategy target of 60%, as is theemployment rate of older workers (31.5%). The employment rate for older women of12.4% is among the lowest in the EU-25 and decreased by 1.5 percentage pointsbetween 2003 and 2004. Under the new scheme, it will be difficult for manymarried women and mothers to reach the 40-year target for a full two-thirdspension; women in certain age groups, who stopped participating in the economyfor a period of 10 years or more, will not have made the contributions needed toqualify. Although the new scheme gives two years credit for each child,considering the wide gender gap in employment rates there is a need for moreeffective means to protect women against discrimination in their old age. Womenshould be better remunerated for their care-giving role in the family, a factorwhich has a considerable weight in Maltese society.

The new pension system does not include an automatic scheme for persons who carefor elderly and less healthy individuals. The Social Security Act provides for acarer’s pension for single people who have left the paid work force to carefor their elderly relatives, but this is governed by a means test and subject tocertain conditions; for instance, the patient must be bedridden or wheelchairbound. In several EU countries, care of the elderly has begun to be creditedwithin the pension system (European Commission, 2006, p. 142),an important feature left out of the new pension scheme even though home care isconsidered a priority in elderly care in Malta (MFSS, 2005).


Pension payments on the decline

Due to the considerable lengthening of the measuring period from the top-earningthree of the final 10 years (a period when workers would be near the top oftheir earning history) to the best 10 of the full 40 years, the remuneration mayno longer be representative of the final salary of workers before they retire.This kind of reform is more likely to harm those who had steep earning rises intheir careers, but may not be any more beneficial to those on a low-incometrajectory. With the new changes, pension payments are expected to be on thedecline, which in turn is likely to raise the risk of the elderly falling backon means-tested social assistance or dropping below the poverty line.

The shift to a more direct contribution scheme and the determination of benefitsby the amount of funds accumulated make it crucial to have an adequate creditingsystem in place for periods during which workers are prevented from contributingby circumstances such as illness, unemployment, training, or caring for childrenand the elderly.

The second pillar, when introduced, creates new questions. In general,multi-pillar reforms are still too new for their long-term impact to be evident.A study by the Hungarian Central Bank (Orban, 2005) notes that “the returnsrecorded so far in the private pension funds fall short of expectations and, onthe condition that these low returns persist, the second pillar is projected toprovide annuities that do not make up for the reduction in benefits receivedfrom the public pillar.” Shiftingthe weight to a direct contribution structure increases the risks shouldered byindividual contributors instead of the state, and can reduce the redistributiveelement present in a more public direct benefit. Given the gender differentialsin employment in Malta, it will also tend to lead to greater gender inequality.The second pillar will also introduce investment and administrative charge risksto pension schemes.

The shift to more direct contribution implies that an individual’scontributions and benefits will become directly linked, reducing thepossibilities of redistribution. Such a move will be negative for lower-incomeindividuals. The longevity risk is shifted squarely to the shoulders ofindividual contributors of the same generation and not borne by the state, sincethe move to a direct contribution scheme shifts the financial risk of changingeconomic and demographic factors from the state to the individual. Takentogether, all these measures tend to disadvantage those with low lifetimeearnings, and their net outcome increases the risk that women will continue tohave lower annual pension incomes.

In general, the parametric reforms are driven by the objective of increasingrevenues and decreasing ‘generosity’ in terms of the annual pension benefitspaid out, and thus they are likely to have a negative impact on the incomes ofcertain strata of pensioners. The new pension reform is mainly driven bydemographic pressure and fiscal stability concerns, and its impact on incomeadequacy and pensioner poverty does not always appear to have been givensufficient assessment. The new reform sends a clear signal to individuals thatthey need to work more to qualify for the same benefit, rather than simplycutting benefits and then possibly facing a political backlash and being forcedto increase them once again. Pensions were introduced in Malta not by chance,but as the result of social consensus after the Second World War that povertyamongst the elderly must be eliminated.


Social assistance to refugees

The government offers asylum seekers and refugees free accommodation in opencentres, as well as an allowance for food and transportation for unemployedimmigrants. Services and the duration of the period for which services areoffered are regulated by an ‘integration and service agreement’ or a‘return and service agreement’. Refugees are given social security benefitsand are also assisted with a rent subsidy (MFSS, 2007).

As of January 2007, the daily allowance given to unemployed refugees in opencentres varies according to the status of the immigrant. A person with temporaryhumanitarian protection is given EUR 4.65, an asylum seeker (someone who isstill awaiting a reply from the Refugee Commission) receives EUR 4.65, and arejected asylum seeker receives EUR 3.5. Couples with children receive EUR 2.33for every child. Persons with refugee status receive weekly social securitybenefits which amount to EUR 81.20 and EUR 8.14 for every dependant.

Both refugees and individuals with temporary humanitarian protection areentitled to work after being issued a work permit by the Employment LicenseUnit, valid for one year. Upon employment, all social security benefits andallowances are stopped. All allowances given in the open centres as well associal security benefits and rent subsidies to refugees are taken from thegovernment budget. All immigrants, irrespective of their status, are entitled tofree health care.

It should be noted that in the Maltese context, the allowances given to asylumseekers and rejected asylum seekers could be compared at par or worse to personsliving on a ‘dollar a day’ in a poor country, if they are not aided bycharity organisations.


Official development assistance

According to the European Commission (2007, p. 164), Malta spent EUR 7 million(USD 9.68million) or0.15% of its GNI on official development assistance (ODA) in 2006. However,questions have been raised on whether the money was actually spent on aidtowards the development of poor countries or for other purposes.

CONCORD (2007), an EU non-governmental development organization (NGDO) platformof which the Maltese NGDO Platform is a member, criticizes the government of alack of transparency on where the money goes and to whom. CONCORD stresses thatcurrently Maltese ODA figures include the cancellation of Iraq’s debt toMalta, money spent on migrants during their first year in the country, therepatriating of migrants, and a number of scholarships given to people fromdeveloping countries. This money is not helping any developing country todevelop and thus should not be counted as ODA. CONCORD further criticizes thegovernment for wanting to tie ODA to the acceptance of the repatriation ofmigrants. The Maltese NGDO Platform has serious reservations on this measure andconsiders that it undermines the rightful focus of ODA, namely tackling poverty.


References

CONCORD (2007). “Hold the applause! EU governments risk breaking the aidpromises”. April.

Commission of the European Communities (2003). “Joint report by the Commissionand the Council on adequate and sustainable pensions”.

European Commission (2006). “Adequate and Sustainable Pensions SynthesisReport 2006”.

European Commission (2007). “‘European Commission Communication” (COM(2007).

Eurostat (2006). “EULabour Force Survey - Principal results 2005”. Statistics in focus.Luxembourg: Eurostat.

Eurostat (2007). Europe in figures — Eurostat yearbook 2006-07. Luxembourg: Eurostat.<ec.europa.eu/eurostat>.

Malta Government(2004). “White Paper on Pensions Reform”. House of Representatives, Malta,24 November.

Malta Parliament (2006). “Act XIX of 2006”, Malta. <www.parliament.gov.mt/information/Acts/>.

MFSS (Ministry for the Family and Social Solidarity) (2005). “National Reporton Strategies for Social Protection and Social Inclusion”. Malta, 15 July.

MFSS (2007). Organisation for Integration and Welfare of Asylum Seekers (OIWAS).Malta.

NSO(National Statistic Office) (2007a). “International Women’s Day 2007”. Pressrelease No. 37/2007, 8 March.

NSO (2007b). “Survey on Income and Living Conditions 2005”. Pressrelease No. 75/2007, 9 May.

Orban, P.(2005). “The sustainability of the Hungarian pension system: areassessment”. Magyar Nemzeti Bank. December.

Pension Working Group (2005). “National Strategy on Pensions Malta”. Malta,15 June.