Italian Pensions: It’s not the last cigarette: maybe not even the second-to-last

Tito Boeri, Agar Brugiavini 16 August 2007

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Habemus pactum. But it’s not the start of a new pact between generations. It’s a plug to buy time while holding out for new corrective measures. But all the fundamental problems remain unresolved, whether in form or substance. No “concertation”1 took place. Now, given that this Agreement continues to undo the 1996 reform, a decision must be made as to what to do with the defined-contribution method.2 Real funds are necessary for real coverage: there’s none from parasubordinati (workers over who are formally self-employed but remain de facto employees). That’s because the annual budget of the INPS3 is being swapped for the social security system’s real budget constraint: the one that looks to the future.

Who really needs to take a step back?

The Agreement was hailed as a victory for “concertation”. But after 7 months of smokescreen efforts (during which it was almost taboo to discuss an increase in retirement age openly), and without any public opinion involved, we come up with a deal that impacts everyone – above all, the younger generations – but that was agreed only by Cgil4, Cisl5, and Uil6. A legitimate question: whom do the Agreement’s signers – Angeletti, Bonanni and Epifani – represent? And how can Raffaele Bonanni (secretary of Cisl) bring himself to ask the politicians to take a step back? The unions should step back, review the rules of “concertation”, and open up a place at the table for others, starting with representatives from the younger generations.

A ruling: with respect to what?

Many commentators have assessed the Agreement based on the expectations that preceded it – when the sudden, impending change of the retirement age from 57 to 60 was at risk. They could have announced €35 billion more in social security spending over the next 10 years (presumably borne by general tax revenues). All to protect 129, 500 old-age pensioners, many coming out of public service, and few (only about 15,000) coming from tiring jobs. It would be hard to come up with a worse scenario. It serves only to highlight what the so-called “maximalist left” wanted. Maybe it should be renamed “old left”. In every sense.

It’s better, rather, to look at the Agreement with regard to the legislation in place before it – that is, what would have happened without it? There are two important changes.

First, a new table of transformation coefficients was approved, which was proposed by the social security expense committee – it presents new values for ages 57 to 65, based on updated demographic and GDP information. And it calls for the table to be updated every three years. That’s good even if it risks being pro forma consent, because it also calls for a committee charged with the task of verifying and proposing these modifications (note: “eventually” had appeared in the Agreement text immediately before “proposing these modifications”, but was deleted).

Secondly, the Agreement includes an increase in social security spending around €10 billion over 10 years. That’s not good – even if this expense will be entirely financed within the pension system. Above all, because financing it will increase contributions from parasubordinati (to get €4.4 billion) – and, in the likely case that the social security system can’t cover it, all contributors will pay more (to get €3.5 billion).

In a country where social security already absorbs two-thirds of overall welfare spending (preventing financing for basic anti-poverty programs), the increase in retirement age should have been financed with other cuts to social security (the only cut in the Agreement was to cap the highest pensions). But there’s also another problem: are we sure that the funds supposedly found to cover these €10 billion really exist?

Is there really coverage?

We don’t know how much the estimates for increased contributions from parasubordinati account for the inevitable loss to the occupation: in four years, the parasubordinati contributions rate has increased 9 points. But there’s an even deeper problem. Where social security is discussed, accounting has to cover several generations, not the INPS budget from one year to the next. If contributions increase today, pensions will also increase tomorrow. Both problems lead to one conclusion: either the Agreement seeks to suppress the link between contributions and pensions, or these “found” funds are “accountants’ magic”: they make the numbers add up today, while increasing the burden of pensions debt on future workers.

Goodbye to the defined-contribution method?

Like the change in retirement age introduced by the 1996 Maroni-Tremonti reform, the Agreement prevents the defined-contribution method from being implemented. It doesn’t make workers responsible: it doesn’t get them used to the idea of drawing pensions based on contributions made throughout their working lives; it doesn’t let them choose when to retire, with rules that allow it as soon as possible. Instead, the Agreement introduces a jungle of arbitrary little steps, differentiated by occupation and work conditions (self-employed workers retire later then employed workers, and women before men) exactly as in Maroni-Tremonti. It’s a triumph of political discretion – a wager that a future government, closer to self-employed workers, will aim to build parity into the Agreement. Then there’s the creation of a commission (as usual made up only of the government and “the most representative labour unions”) that will have to find a way to guarantee "a replacement rate of at least 60 per cent"? Aside from the ambiguous formula (it wants to guarantee that everyone retiring at €200,000 per year gets a €120,000 pension), how is it possible to make promises like this in a defined-contribution social security system? For the youngest workers, it adds insult to injury in the form of an empty promise.

It won’t be the last reform

We were hoping for a definitive reform. But the protagonists of this Agreement are, once again, deluded by the myth of the last cigarette: they savour it, saying it’s their last one, knowing full well that it isn’t, as in Italo Svevo’s novels. This isn’t the last – not even the second-to-last – reform. Who says that in a year, there won’t be a new and extensive attempt to change all the steps the Agreement introduced? An attempt is, in fact, already anticipated for 2011. And then we’ll have to grasp what will happen to the workers from the pure contributions system (those who started to work in 1996). In fact, the Maroni rules eliminated the 57-65 years-old retirement window for them too, stipulating a strict 65 years (60 for women). They also expect to define old age as 35 years of contributions, and 62 years of age (having accumulated at least 40 years of contributions). It’s not clear whether the Agreement rules also apply to these workers (for example, with 36 years of contributions + 61 years of age – also a quota of 97). Clearly, the link between the two systems must be re-established to avoid a jungle of rules. For that, too, new interventions will be worth it.

This article originally appeared in Italian, at www.lavoce.info. Tito Boeri and Agar Brugiavini, “Non è l'ultima sigaretta, forse neanche la penultima”, 23 July 2007.

 

 


 

Footnotes

1 Concertazione (“concertation”) is an established system of policy-making in Italy that brings government and social interest groups together to facilitate consensus in decision-making.
2 When properly applied, the “defined-contribution method” is the only pensions system able to guarantee financial sustainability (a balance between incomings and outgoings) and fairness across generations. Its alternative is a pensions system governed by political discretion.
3 INPS is the National Italian Institute of Social Security (Istituto Nazionale Previdenza Sociale; www.inps.it)
4 Cgil is the Italian General Confederation of Labour (Confederazione Generale Italiana del Lavoro, www.cgil.it)
5 Cisl is the Italian Confederation of Labour Unions (Confederazione Italiana Sindacati Lavoratori, www.cisl.it)
6 Uil is the Italian Labour Union (Unione Italiana del Lavoro, www.uil.it)

 

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Topics:  Welfare state and social Europe

Tags:  Italy, pensions, pension reform

President, Italian Social Security administration (Inps)

Professor of Economics at the University of Venice and an International Fellow of IFS

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