Fabian Demicoli

Reform of the pensions system for adequacy, sustainability and security

 The GRTU National Executive Council has today convened and discussed amongst other subject the EU White Paper on Pensions. In his report the Director General Vincent Farrugia pointed out that:
As a result of low birth rates and rising life expectancy, the population is ageing. Projections on demographics should therefore be analysed and monitored on a regular basis to allow adequate and timely adjustments of the pension system to new conditions.

 

However, these projections, including future public expenditure on pensions, must be used and viewed with care, as they may include many assumptions hard to predict in the long term. Eurostat's assumption that life expectancy will increase by seven years in the EU over the next 40 years, although based on the best expert knowledge, cannot be certain. Further improvements in longevity can be influenced by changes in working and living conditions. It is doubtful that a mere rise in legal retirement age can solve the problems connected with demographic challenges.

On the contrary, this may push a substantial number of elderly people below the poverty line, particularly women. What is needed is to increase the effective retirement age up to the existing legal retirement age using initiatives to foster extended working life, flanked by effective growth and employment policies. Only a real "active ageing" policy, aimed at increased participation in training and lifelong learning, can sustainably boost employment rates for older people, who give up work early due to health problems, the intensity of work, early dismissals, and lack of opportunities for training or re entering the labour market. In addition, a rise in legal retirement age can increase pressure on other pillars of social security. Automatic adjustment mechanisms for retirement age, based either on longer life expectancy or demographic change, may be assessed as dangerous for society as a whole and therefore not supported.

Most of these mechanisms automatically increase retirement age in correlation with extended life expectancy and other economic or labour market parameters. Such fundamental decisions on living conditions should be taken by parliaments, not computers, after a broad public debate, including social partners and other important stakeholders. In addition it should also be taken into account the fact that although it reduces public pressure against reforms, in the absence of real job opportunities for older workers it could shift financial support for these workers to other social security pillars. Thus, implementing bluntly this mechanism into pension schemes to make pensions adequate and sustainable would fail to deliver the promised benefits. All pension schemes, regardless of financing method, can be affected both, but in different ways, by economic crises and by ageing.

Therefore, good management and supervision of these schemes and economic policy are necessary to reduce considerably the risks that threaten their sustainability. The Pay-As-You-Go mandatory schemes must continue to play a fundamental role in assuring future pensions and therefore special attention should be devoted to them in order to inverse the tendency of decreased replacement ratios. At a time of population ageing, success in ensuring sustainable public finances will depend on the efforts in the following key areas: supporting quantity and quality of employment, raising productivity and economic performance, improving flexicurity in the labour market, lifelong learning, immigration and the integration of migrants.

 A pension system must be credible and adequate, what implies searching for and implementing new financial resources in order to guarantee an inter-generational balance. Only then will future generations contribute to a pension system, a crucial condition for making pension schemes sustainable. Pension systems must be transparent, and information and statistics on their functioning as well as on all rights of the participants must be available and understandable. Training in financial literacy should become part of school curricula.

Pensions are not a "reward" but rather a form of deferred wage or saving, irrespective of the type of system. Pensioners are a very important socio-economic category and should not be seen as a burden but a key economic player comprising on average 25% of the population, who fuel demand. Adequacy and sustainability of pensions should be considered as a priority both from a macroeconomic and a social perspective. This is a vital issue for the economy, and so the competent authorities should consider looking for sources of funding or ways of complementing it, other than levies on salaries, to help financing the pension systems.

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