Pensions across generations: scenarios for the Maltese Islands

ABSTRACT

This paper tests whether in a PAYG system there is an inter-generational balance between the contributions made during the working-career and the pension benefit received in retirement; covering different cohorts. The analysis takes Malta as a case study. Though the dependency ratio is comparatively low, the population is rapidly ageing. The results show that there is a generational imbalance with the young cohort unlikely to be any better off than those who have already retired. This however is sensitive to the assumed discount rate and the ‘no policy’ change scenario. The results also show that future generations may be net-gainers assuming a sustained level of wage growth. If, on the other hand, wage growth slows, the younger generation may become increasingly reliant on the bequests of older generations. This would explain why pressure has increased to regularly adjust the existing PAYG system as well to introduce other forms of pension schemes.

KEYWORDS:

• Inter-generational balance
• generational accounting
• public pensions

Acknowledgements

The opinions expressed in this paper are those of the authors only.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Melchior Vella is a Visiting Lecturer, Department of Economics at the University of Malta. He holds a MSc in Economics from the Department of Economics, University of Essex.

Philip von Brockdorff is Head, Department of Economics at the University of Malta. He holds a DPhil from the Department of Economics, University of York having specialised in the field of Economics of Ageing.

Notes

1 The National Minimum Wage was introduced in 1974. Prior to 1974, the minimum wage rate applied to civil servants. Prior to 2005, the average salary was indexed with the average employee compensation, derived from the National Accounts, as no other alternative indicator is available. This also allows to adjust for the break in time-series. Furthermore, the Maximum Pensionable Income was non-existent before 1979. Here, it is assumed that the maximum insured wage moves in tandem with the minimum wage for the period 1956 to 1978.

2 We take into consideration a discount rate lower than 5% to account for the fact that future discount rates are uncertain but have a permanent component, which implies that the ‘effective’ discount rate must be lower (Gollier, 2002). This is particularly justified when contrary to the standard assumption, shocks to the growth rate of consumption per capita are positively correlated over time (Arrow et al., 2013).