Malta with the highest expected rise in pension generosity across the EU

Malta will see the highest rise in pension generosity across the EU, and is on its path to become the second most pension-generous Member State. This defies the current trend across Europe, as the European Commission projects a 9% decline in the generosity of pensions by 2070.

Every two years the European Commission publishes a comprehensive report on the future of public pension systems, known as the Ageing Report. The latest edition of this report makes for very interesting reading. The projections made suggest that compared with previous results, there was a “downward pull on pension spending” across the EU. This was due to a range of reforms that reduced pension generosity, with the European Commission cautioning that “such adjustments could affect pension adequacy, defined as the extent to which pension benefits suffice to ensure retirees a decent living standard and protect them from poverty”.

To quantify this effect, the Commission calculates the replacement rate, which “expresses the average new pension as a share of the average gross wage at retirement”. Its study indicates that on average in the EU there will be a projected decline in the generosity of pensions equal to 9%. While pre-pandemic, the average pension amounted to 46.2% of the average gross wage at retirement, by 2070 this will go down to 37.5%. This means that relatively speaking, pensions will become 20% less generous over the next decades.

The study shows that Malta will buck the trend. Instead of seeing a 9-percentage point decline in the replacement rate, in our country this will increase by 9 percentage points. Thus, while at present Malta’s pension generosity, at 48.4%, is just above the average EU value, at 46.2%, by 2070 Malta’s pension generosity will become the second highest in the EU, just below Luxembourg. Instead of becoming 20% less generous as in the rest of the EU, in Malta pensions will become relatively speaking nearly 20% higher.

Leading economists speaking to say that this result is testament to recent moves by the Maltese Government to end the real freeze on pensions. By raising pensions well above the rise in inflation and putting in place measures to raise generosity such as better contribution credits for those dropping from labour to care for children or to further their education, the Maltese Government has done the exact opposite of other European Governments which have instead lowered pension generosity.

The generosity of the French scheme is set to fall by over a third of its current value, while the Spanish scheme is projected to fall by nearly half. The Italian and Greek pension schemes will become a quarter less generous than they are now.  

The 2012 Ageing Report had projected that over 50 years, Malta’s pension spending would rise by 5.5% of GDP. This despite the fact that in the report Malta’s pension generosity was forecast to decline by 8 percentage points.

By contrast, despite that in the latest report Malta’s pension generosity is projected to increase by 9 percentage points, the expected rise in pension spending over 50 years is 3.8% of GDP. The key reason for this paradox is that projections of Malta’s long-term economic growth have shot up, particularly because of the spike in the labour participation rate observed in recent years.

Government’s success in raising economic potential has not just allowed pensions to become more generous but has also made them more financially sustainable.

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