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A closer look at the two-thirds pension

With life expectancy continuously rising, retirement planning has become more important and essential than ever before

The landscape of human longevity has been undergoing a significant transformation, prompting a revaluation of the concept of retirement.

With life expectancy continuously rising, retirement planning has become more important and essential than ever before for a decent quality of life after one stops working. This increase in lifespan requires a fundamental change in how retirement is perceived – not as an endpoint but as a vibrant and meaningful chapter in life’s journey.

Gone are the days when retirement was seen as the cessation of professional contributions, often associated with a period of decline, with passing over the rainbow being the next soon-to-be step. 

As people live longer and healthier, research suggests that a person who is 65 today exhibits similar health conditions desires, and aspirations to those of a 50-year-old person from the 1980s, who then had an additional 11 years of employment ahead. 

Nowadays, retirees envision a post-career life filled with opportunities for personal growth, community engagement and pursuing long-held interests that were put aside due to work and family responsibilities. They also expect to retain the same quality of life they enjoyed before retirement – whether this relates to leisure, travel or entertainment.

This expectation of enjoying, during an ever-increasing period of retirement, the same quality of life they had during their working life is dependent on one cardinal factor: the extent to which they have planned their financial security to see them achieve their financial goals and aspirations during this period. In the rapidly changing socio-economic landscape, financial security in retirement cannot be overstated. 

It is pertinent to recall that the reforms to the social security system in 1979 established a social contract that guaranteed a pension that is two-thirds to a maximum limit – the limit identified being the salary of the president of Malta. Two-thirds, or 67%, of a pension resulting from being pegged to the president’s salary offered a more than fair State pension income.

A person who is 65 today exhibits similar health conditions, desires and aspirations to those of a 50-year-old from the 1980s– Josef Bugeja

Over time, however, this relationship between the two-thirds guarantee and the president’s wage was not retained, primarily because the 1979 pension system did not provide for a mechanism that allowed the maximum pension income to automatically increase at the same level by which the president’s salary was increased. 

Between 1979 and 2006, the maximum pension income (MPI) increased by only €1,747 – or €64.7 annually. During that same period, the average wage, let alone the president’s salary, increased many times.

The cardinal principle underpinning adequacy derived through maintaining the relationship between the two-thirds State pension and the average wage, let alone the salary of the president, was broken.

This meant that the gap between income earned from employment and the State pension income got larger and larger on retirement.

At the same time, time value over money and inflation further depressed the purchasing power of the pension income.

Pension reforms in Malta through the years sought to resolve this adequacy-income-problem. By and large, they sought to achieve this by establishing an adequate income footprint that would provide retirees with the quality of life they desire in retirement and then establish the determinant to achieve this.

This is the first of three articles to be published on this subject.

Josef Bugeja is secretary general of the General Workers’ Union.