Reviewing the pensions paradigm: a disruptive opportunity?

In 1889, the first system of State pension provision was introduced by German Chancellor Otto Von Bismarck. At its inception the system afforded a pension to all those who attained 70 years of age, although the average life expectancy was of around 37 years of age. With time, came advancements in medical and sanitary standards, but it also brought with it the challenges of people’s longevity and the sustainability of the pension system and the economy as a whole.

Today we see a global average retirement pension age of 65, with an average life expectancy reaching well beyond 75 and 80 in most developed countries. This trend, coupled with the converse trend of declining fertility rates in many developed countries, sets the stage for the inevitable question: “is this sustainable?” In economic and demographic terms one would simply refer to this as the ‘ageing dependency ratio’, that is, how many people who are past retirement age are 100 people of working age expected to sustain?

Lower ratios contribute to better pensions and social benefits for retirees, while higher ratios increase the financial stress on the entire population and economy as a whole, not to mention political pressure on governments to actually deliver a pension.

Although strategic programmes to decrease such a ratio can and are implemented through incentives to increase fertility and through immigration, competing challenges are emerging through the advancement of industries of automation and its effect of occupation rates and other socio-demogra­phic trends that act as a drag in the opposite direction.

Barring an unprecedented economic revolution, the younger political generation is inevitably going to be saddled with the difficult but inevitable decision of increasing taxation to fund the pension and social benefit machine to the detriment of the working generation and for the benefit of an ever growing number of people exiting the State’s available pool of human capital.

Be that as it may, the picture is not entirely bleak.

Many opportunities abound as a result of the increase in technology, artificial intelligence and robotics, and we may yet come to see abundance filter in all of our futures. Furthermore the geriatric and pensions industry are expected to churn out a significant amount of wealth opportunities through both the finance and pension provision industries and the medical and nursing industries by creating numerous jobs and business opportunities targeting a massive trillion-dollar global market that is composed of the third age.

Yet at present, in spite of all this, it seems that with the exception of certain countries and entrepreneurs, few have taken this opportunity seriously. Most States seem keen on placing reliance on current, quasi-obsolete, financial and social security systems – an action that in the long run will leave the State powerless in front of the tsunami of retirees that will be dependent on the system in the next few decades.

Other States have capitalised on this opportunity by shifting this enormous burden, at least in part, on the private sector and on people themselves – through tax incentives geared to promote financial disciple and investment for retirement through occupational and private pension plans. This move has made certain States emancipate their citizens to financial adulthood and maturity and has not unscrupulously left the tab up to the younger generations to pay.

Such incentives have included a reduction on taxable income corresponding to amounts placed in a pension plan by the taxpayer (including employers contributing to a pension plan for his employees) as well as tax credits granted to pension plan contribu­tories for every hundred or thousand deposited. These are actions of significance, because unlike simply increasing State pensions, which basically acts as State patchwork on a sinking ship that is its economy, such incentives shift people’s mindset to one that intrinsically motivates them to built their own future and their own vessel.

Today we stand at a turning point once again. At the end of each financial year of the country, every finance minister everywhere faces the choice of whether to postpone the inevitable or to take a step in the right direction to promote a world view that is healthy and responsible for the country.

Much like the years prior to Bismarck marked a shift in socio-economic dynamics which called for the necessary change in mentality, we too, just over 120 years later, are faced with the choice to carry a renewed and fresh mindset to address the challenges of our times regarding pension schemes in Malta

Jens Buedinger
GANADO Advocates

This article was first published in The Sunday Times of Malta -  July 23, 2017 (This is the first of two articles on pensions).

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