Smaller slice of a bigger cake | Moses Azzopardi

For some years now, ‘pension reform’ has (officially, at least) been high on the agenda for successive administrations of government. What this means in practice is that there has been no shortage of discussion on the subject – resulting in an ever-increasing stockpile of consultative reports, replete with suggestions and recommendations – yet still no real legal reform all these years later.

Moses Azzopardi has an obvious interest in the matter: as chairperson of the National Pensioners’ Association, he represents all Malta’s pensioners… not least, the estimated 22,000 who receive less than 500 euros a month.

“But it’s not just for my own generation that I worry,” he tells me as we get started. “I have children, and we have to also look at what sort of future we bequeath to them, too…”

The forecast for this future doesn’t look great at the moment, it must be said. When talking about pension reform, the emphasis has overwhelmingly been on sustainability. Falling birth rates, coupled with greater longevity in general, have created an impending time-bomb whereby present contributions will not be enough to guarantee pensions beyond 2027 (to give the official target date).

But we also have to look at the present. What is the current situation facing the pensioners of today? And to stick to the sustainability theme… is a State pension today enough to sustain an adequate, decent standard of living?

“I asked much the same question at a recent seminar. Apart from their sustainability, we also need to look at the adequacy of pensions. You can’t only look at one aspect: you have to also look at how people are affected…”

Echoing concerns he raised at that meeting and elsewhere, Azzopardi stresses that the problem concerns how the rate of poverty is calculated. “At the moment there is a lot of talk about people at risk of poverty, and the need to reduce their number. This was included in the Labour Party’s manifesto….”

The Finance Ministry has indeed recently announced successes in this regard. Azzopardi however remains unconvinced.

“First, we need to distinguish between ‘absolute’ and ‘relative’ poverty. Absolute poverty means being deprived of the essentials. Relative poverty means being unable to enjoy a decent standard of living. If there are studies to be done on poverty levels in Malta, we want them to be done on the basis of relative poverty… not the sort of poverty that exists in Africa. And we need to look at disposable income – after tax and basic expenses, etc., are deducted – as opposed to income in general….”

Needless to add, this is not how the government makes its own calculations… nor, for that matter, the European Commission. Both base their definition of ‘risk of poverty’ using the threshold income of 60% of the median salary. In Malta’s case, this works out at 7,672 euros per annum. 

Azzopardi argues that the calculation is grossly misleading. 

“Everyone gets mixed up on this issue. But politicians get it mixed up all the time, with all due respect. I’ve said the same thing to both Nationalist and Labour governments. They are getting their definitions wrong, and confusing the public…”

When we talk about ‘median’ income, Azzopardi points out, we are not talking about the average national salary. “If we were talking of the average salary between five people, you would add up the salaries and divide by five. For the median, however, you take the one in the middle. You might tell me that I’m splitting hairs; but let me explain the difference. The national average disposable income is 24,730 a year. The median is 12,787. Almost half. That’s a big difference…”

Nor is this the only problem with the calculation. “A study commissioned by the EU, conducted in Antwerp, established two principles: one, not to form the study panel only out of people who are themselves at risk of poverty. Otherwise, you’ll only be examining how poor people live. You will be doing nothing to elevate them out of poverty. You have to also include people in the 60-70% of median income bracket, to have a reference point to bring the others up to the same level.”

The second principle is somewhat more blunt: “To answer your original question, the simple truth is that people cannot live decently on only 60% of the median wage. In fact, the Antwerp study does not specify that calculation should be 60% at all: it says ‘not less than 60%’. So 60% is actually the minimum…”

And yet, even though Europe’s own study reached this conclusion, the Commission’s proposals (adopted locally) still set the minimum reference point as its definition of poverty risk. 

“We feel that we shouldn’t abandon the principle that it should not be less than 60%. But as you can see it has already gone down, from ‘not less than’ to ‘exactly’. We don’t want it to be lowered any further. Ideally, it should be raised…”

Even within the already low denomination under which pensions are calculated, there are discrepancies that leave some pensioners worse off than others. Azzopardi points towards a number of budgetary measures which would, he concedes, alleviate the risk of poverty for single persons.

The situation changes drastically, however, for couples and families.

“The problem concerns ‘equivalised income’. It is true, as the government says, that if you add up all the bonuses and other benefits introduced in the Budget, the aim of elevating single people from poverty will have been reached. But for couples and families, we are very far from reaching that aim. If you take a couple, and let’s say – otherwise, women will all jump on me – that we take the higher of the two earners, regardless whether it’s the man or the woman. You give the higher earner a score of ‘1’. The other half of the couple gets ‘.5’. Now, if you calculate their joint income as 60% of the median income, the threshold of poverty for that couple becomes 11,508. Is that enough for two people to live on adequately? I don’t think so…”

The situation takes a turn for the surreal when larger families are concerned. “If you take couples with children under 16 years of age, you also add .3 for each child. The threshold goes up as a result, but…” here he gives me a look of pointed irony – “how many couples over 65 are you get going to find who have children that age? You’ll find a few, yes. But not many. Let’s be realistic here…”

It seems to me, then, that the government is playing with the figures until it finds a formula that allows it to keep pensions to the barest minimum. Azzopardi is reluctant to put it that way himself. 

“The way I see it, the government says it is raising people out of poverty, and up to a point it is true. But it doesn’t say that it’s only referring to single people. It doesn’t say that married couples are much worse off as a result… 

Another thing the government keeps quiet about, he implies, is that its own targets have been substantially lowered. “This is something your own paper should look into. Some time ago you carried a story, under a large headline saying that the government’s aim was to remove 23,000 people from below the poverty line. It was when Marie-Louise Coleiro Preca was still Social Policy Minister. Today, [Minister] Scicluna only boasts about how poverty is not on the increase. There is no more mention of those 23,000…”

At the time of this announcement, Azzopardi had asked the minister for a breakdown of the 23,000 figure. “She didn’t reply straight away, but around a week later it emerged that 12,000 would be children, 8,000 elderly persons, and 3,000 ‘other categories’. Naturally we were thrilled to hear this, as the number of elderly at risk of poverty is over 22,000. Now… and this is paradoxical: people are all saying different things… that the rate of poverty is going up, that it’s going down… but the paradox is quite simple really. It goes back to how you define poverty…”

He pauses to explain the three factors used in the equation. “There’s the deprivation rate. What this means is that, if there are nine things and you can’t afford four of them, then you are ‘seriously materially deprived’. If you can’t afford three, you become ‘materially deprived’. This category, across the whole population, went up. The second consideration is ‘risk of poverty and social exclusion’. Again this went up… in a recent report, the European Commission said that Malta’s increase was the third highest in all of Europe. That’s based on government calculations. If you base it on the reality, I would say we are the European country with the highest increase in people at risk of poverty…”

Either way, both those categories have grown this year. How, then, does the government claim that the number of people at risk of poverty has gone down? The answer, he informs me, involves the third consideration.

“For starters, when the materially deprived and ‘risk of poverty’ brackets are calculated, any duplications… that is, people who fall into more than one category… are counted only once. But leaving that aside: to these people are then added anyone who’s spent more than four months of the last year unemployed. So what happened in Malta? Unemployment dropped considerably. And the effect of this employment growth nullified the impact of the increase in materially deprived and poor people…”

All this puts some perspective on how pensions are calculated today, but we are no closer to addressing the future sustainability issues. This brings us to the parts of the reform that have not been implemented: not least, the second and third pillars.

“The idea behind the second pillar is that, in return for your service, your employer pays you a pension upon retirement. What the employers actually suggested was that the employee would contribute 4% of his salary towards the second-pillar pension fund, with the employer contributing another 4%...”

In the latest discussions, however, this proposal did not resurface. Azzopardi expresses concern that questions such as these need to be answered. Private pension plans are vulnerable to stock market fluctuations, and the recent economic crisis in Europe left many people on private pensions penniless. Azzopardi warns that a similar scenario may unfold here, unless the fund is guaranteed.

“What we don’t want is for the government to totally abdicate its responsibility. The government should intervene to at least guarantee the capital forked out by employees. We should also look at what happened in other countries. Three years ago, a similar fund in the UK – where there is no government control – lost 23%...” 

The success of this system also depends on how it is implemented. “It could be mandatory – as, I believe, was the original intention – or it could be voluntary. When Ireland introduced a voluntary second pillar pension, only 12% availed of it…”

Nor is this the only factor. At the recent seminar, it was suggested that employers pay no contribution at all. “One country was mentioned as a model where this works in practice: New Zealand, I believe. But if this is the way we are going to go about it, we may as well not introduce anything at all. We should either introduce a second pillar pension along European lines, or nothing…”

This leaves the third pillar, which can (for brevity’s sake) be described as purely private pension schemes. “We have nothing against the third pillar. But we don’t want there to be too many tax incentives supporting it. That there would be a few is understandable. But in other countries, studies found that this widens the gap between rich and poor. And yet, in Malta this system is often justified on the grounds that it reduces poverty… 

He shakes his head in mock confusion. “This has nothing to do with reducing poverty. Who will benefit from this measure? Only the people who can afford to make an extra contribution. People who can’t, will remain at the same level. This is also why we don’t want a lot of tax incentives. Otherwise, we’d have a situation where tax money that is paid by everyone, will be utilised only for the benefit of those who can afford to pay for a third pillar pension. It would be unfair on those who can’t…”

Having said this, Azzopardi reiterates that there is nothing wrong with the principle itself, if applied fairly.

This brings us to the implementation part. Despite having been on the cards all these years, neither first nor second pillar have ever materialised. What has materialised, however, is an increase in retirement age to 65. 

The official justification is that people are living longer. Isn’t this just the thin end of the wedge, however?  

“I brought this up at a recent meeting chaired by the European commissioner for Employment. I stood up, and said that I disagreed with the Commission that the pensionable age should increase in step with longevity. I feel it should increase according to how much one’s healthy years increase…

Lifespan alone is not a fair measurement, he argues. “If people are living longer, it doesn’t mean that they are healthy all that time. There are people with dementia, and other ailments which render them unable to work. You can’t include those in your calculations…”

Besides, Azzopardi also argues that while life expectancy has indeed gone up, the average span of healthy years has actually gone down. “When I pointed this out to the Commissioner, he replied that we still had to look at the statistics, because different member states measure things differently. But he acknowledged the problem, and said that ‘we will have to see about it’…”

All the same, according to the latest recommendations by the European Commission, the official target remains to raise the pensionable age according to average lifespan… without taking into consideration the average health of people living longer. 

“And the government of Malta agrees, because according to the latest report, one of its recommendations is ‘life expectancy’…”

All along there remains the apparent contradiction, whereby the economy is widely perceived to be in good shape, which somehow still can’t afford to implement a basic reform, affecting society’s most vulnerable, which we all know to be necessary. 

“The cake grew bigger, yet somehow we got a smaller slice,” Azzopardi points out wryly. “This, ultimately, is what annoys us the most.”