My article published in the Times of Malta issue of Saturday 9th June 2012.
I followed with interest the articles that appeared in The Times
regarding pensions, one reporting the European Commission’s warning that
the pension system needs further reform for it to become sustainable
and the other reporting the government-appointed working group’s warning
about the unsustainable pension trap for over-30s.
It is now becoming obvious to everyone that the “pay-as-you-go” two-thirds pension scheme introduced in 1979 was an unsustainable pyramid scheme, devised as a short-term political ploy with no long-term consideration of its future consequences.
A pyramid scheme because, as devised, on average it requires three to four workers to contribute for the pension of one retired person and who, when they themselves retire, will require nine to 16 workers to contribute for their own pension.
The only way such a scheme could be sustained was through an ever-growing exponential increase of the working population: an ever-growing fertility rate coupled with no increase in life-expectancy. These are two requirements that common sense shows contradict the fact that we live on a finite planet and health research keeps improving. To make the problem worse, fertility rates continue to dwindle while life-expectancy continues to rise.
Ironically, while such a type of pyramid scheme is deemed illegal in many countries when applied by any private enterprise, it has been widely accepted when applied by the government.
It was sold to the people as a sort of national insurance when it works nothing close to an insurance. In fact, younger generations keep paying higher NI contributions to pay up for an increasing number of contemporary retired people and not for their own retirement pension.
Contributions. That’s how this new tax was accepted by the people and which we can now fully realise only ensured that today, more than 30 years later, the elderly have retained their high-risk-of-poverty status. A new tax which also imposed a new burden on the employer, relative to the employee’s wage, thus disincentivising full-time employment and wage increases because the employee has to consider this added cost when thinking about employing someone.
The bubble is now about to burst and, if nothing is done to reverse this unsustainable scheme, we will only ensure that, in a further 30 years’ time, my generation and younger ones will be at a higher-risk-of-poverty. We’ll be the generations paying the highest contributions for a pension that we will never see the light of, except, maybe, on our deathbed. And our children’s situation will be worse.
It is blatantly obvious that the only thing the pay-as-you-go two-thirds pension scheme has achieved is that the elderly stay in a permanent risk of poverty.
The only way I believe the pension system can become sustainable is by having this pay-as-you-go pyramid scheme gradually run down. In my opinion, the aim should be that, 30 years from now, pensions will no longer be tied to wages but only a national minimum pension, based on the minimum wage, is paid to all social security contributors (to act as a safety net). In the meantime, NI payments of the younger workers of today are reduced so that they can have the freedom and choice to save for their retirement as they deem fit.
Of course, a staggered approach for the in-betweens needs to be planned so that those who have paid NI contributions for years still get an adequate pension commensurate with their payments and their wage while those who will have their NI contributions reduced will have to rely more on their savings and investments.
Such an approach may not be politically attractive because its positive results will only be seen years from now when the whole pension system becomes sustainable again, unlike the immediate popularity the introduction of the present unsustainable scheme had brought. However, I still believe that it’s the right and more just way of solving the impending pensions time bomb for future generations.
The end result would be that though, yes, some elderly will still be at a high-risk-of-poverty (as most of them are today), at least, those who save wisely may enjoy a more comfortable retirement.
At least, the choice between either being a spendthrift throughout your working life and poor in your retirement or being more prudent in your working life and more comfortable in your retirement would be up to the individual to make and not up to any politician or any government.
At least, it would be up to the individual to choose whether he saves so much that he can stop working at 50 or he saves so little that he needs to keep working till he’s 70.
It definitely gives the people much more freedom than the proposed obligatory second pillar and the continuous attempts to tie retirement age to life expectancy, forcing workers into labour till they become venerable septuagenarians.
It is now becoming obvious to everyone that the “pay-as-you-go” two-thirds pension scheme introduced in 1979 was an unsustainable pyramid scheme, devised as a short-term political ploy with no long-term consideration of its future consequences.
A pyramid scheme because, as devised, on average it requires three to four workers to contribute for the pension of one retired person and who, when they themselves retire, will require nine to 16 workers to contribute for their own pension.
The only way such a scheme could be sustained was through an ever-growing exponential increase of the working population: an ever-growing fertility rate coupled with no increase in life-expectancy. These are two requirements that common sense shows contradict the fact that we live on a finite planet and health research keeps improving. To make the problem worse, fertility rates continue to dwindle while life-expectancy continues to rise.
Ironically, while such a type of pyramid scheme is deemed illegal in many countries when applied by any private enterprise, it has been widely accepted when applied by the government.
It was sold to the people as a sort of national insurance when it works nothing close to an insurance. In fact, younger generations keep paying higher NI contributions to pay up for an increasing number of contemporary retired people and not for their own retirement pension.
Contributions. That’s how this new tax was accepted by the people and which we can now fully realise only ensured that today, more than 30 years later, the elderly have retained their high-risk-of-poverty status. A new tax which also imposed a new burden on the employer, relative to the employee’s wage, thus disincentivising full-time employment and wage increases because the employee has to consider this added cost when thinking about employing someone.
The bubble is now about to burst and, if nothing is done to reverse this unsustainable scheme, we will only ensure that, in a further 30 years’ time, my generation and younger ones will be at a higher-risk-of-poverty. We’ll be the generations paying the highest contributions for a pension that we will never see the light of, except, maybe, on our deathbed. And our children’s situation will be worse.
It is blatantly obvious that the only thing the pay-as-you-go two-thirds pension scheme has achieved is that the elderly stay in a permanent risk of poverty.
The only way I believe the pension system can become sustainable is by having this pay-as-you-go pyramid scheme gradually run down. In my opinion, the aim should be that, 30 years from now, pensions will no longer be tied to wages but only a national minimum pension, based on the minimum wage, is paid to all social security contributors (to act as a safety net). In the meantime, NI payments of the younger workers of today are reduced so that they can have the freedom and choice to save for their retirement as they deem fit.
Of course, a staggered approach for the in-betweens needs to be planned so that those who have paid NI contributions for years still get an adequate pension commensurate with their payments and their wage while those who will have their NI contributions reduced will have to rely more on their savings and investments.
Such an approach may not be politically attractive because its positive results will only be seen years from now when the whole pension system becomes sustainable again, unlike the immediate popularity the introduction of the present unsustainable scheme had brought. However, I still believe that it’s the right and more just way of solving the impending pensions time bomb for future generations.
The end result would be that though, yes, some elderly will still be at a high-risk-of-poverty (as most of them are today), at least, those who save wisely may enjoy a more comfortable retirement.
At least, the choice between either being a spendthrift throughout your working life and poor in your retirement or being more prudent in your working life and more comfortable in your retirement would be up to the individual to make and not up to any politician or any government.
At least, it would be up to the individual to choose whether he saves so much that he can stop working at 50 or he saves so little that he needs to keep working till he’s 70.
It definitely gives the people much more freedom than the proposed obligatory second pillar and the continuous attempts to tie retirement age to life expectancy, forcing workers into labour till they become venerable septuagenarians.
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