MALTA - The Maltese government is to overhaul the country's pension system with the introduction of both the second and third pillars in a bid to ensure the adequacy of future pensions.
Cabinet is expected to finalise the details of the reform this week, but prime minister Lawrence Gonzi (pictured) this week said the second pillar model would likely be a “hybrid” structure that sat between full privatisation and government control.
Gonzi said while the current system, which has only the first pillar or state pension provision, was sustainable, it was not sufficient as a sole form of income in retirement. Malta has a pay-as-you-go pension system whereby a person receives two thirds of their final salary upon retirement.
“[Malta] is facing the same challenges as other countries, we have an ageing population and people are living longer,” he said. “But we also recognise that the system will eventually start to generate pensions that [in the future] will not be adequate. We are already starting to face this challenge.”
The basis for Malta’s imminent reform is a white paper produced last year by a pensions working group headed by the Cabinet committee’s support unit. Consultation on the report ended in April this year.
Gonzi said the government had studied many countries, including the UK and Argentina, in developing Malta’s proposed pension policy.
In 1994, Argentina created a dual social security system whereby employers are required to make contributions to the existing “allocation” system administered by the government and employees can opt to have their contributions deposited and managed by private funds known as Retirement and Pension Fund Administrators.
Gonzi cited concerns over the misappropriation of funds in a fully privatised system and stated Malta’s intention to implement safeguards or ringfencing measures to prevent such problems within its own reform model.
He would not be drawn on the fiscal incentives the government would provide to encourage saving in the second pillar or private market, however he added: “Undoubtedly if we are to introduce the second and third pillar it will only be successful if there are financial incentives for that to take place. [However] we need to ensure that the incentives we introduce do not undermine the fiscal stability we are working so hard to achieve.”
The government is expected to announce changes to taxation, particularly income tax, as part of the pension reform. It may also include changes to the taxation of property, which is currently the main savings vehicle of the Maltese.
In addition, Gonzi said the retirement age of 61 for males and 60 for females would likely be increased to 65 over a long period of time.
Legislation for the reform is expected to be introduced in early 2006.
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