The Italian pension system and its future reforms

This work explores the evolution of the pension system through the decades from when it was first introduced after World War II to the present

Introduzione

Abstract

“Italy is characterized by a mature pay-as-you-go social security system and by particularly adverse population projections” (Forni and Giordano, 2001). This sentence effectively describes the main features of the Italian pension system as well as its limits. This work explores the evolution of the pension system through the decades from when it was first introduced after World War II to the present, accounting for both the major reforms undertaken in the early 1990s and those that, as widely recognized, must still be made in the future. Analyzing expected reforms requires a close look at the population projections and mostly at the state of Italian public finances.

The probable shift toward more privately funded scheme in order to reshape the system in a sustainable way, raises questions about the role the state should play in controlling an economic instrument that is so important in the life of society by affecting income redistribution and consumer smoothing. Therefore, it is important to investigate the future development of the system in terms of efficiency and areas of public intervention the state must retain, especially in light of a future development of a privately funded pillar.

1) Introduction

Since the beginning of the 1990s the Italian social security system has been the objectof serious reform. This process first started in 1992. However, further steps are expected to complete the reform, including a transitional period prior to implementation. The need to accentuate this process has emerged as a remedy for the disadvantageous socio-economic trends that have characterized Italian society in recent decades and that constitute serious concern regarding the financial sustainability of the system. The main problems are the current demographic trend, the state of public finances and slow economic growth.

As Brugiavini, Peracchi and Wise (2003) point out, Pay-as-you-go systems around the world have accumulated large unfunded liabilities and population aging has been the primary explanation for the consequent increasing financial pressure. Italy, is not an exception, and like most of the countries in the western hemisphere, faces the problem of an increasingly aging society. This established trend is the result of a decreasing fertility rate (1.2 children per woman) on one side, and on the other of an increasing level of life expectancy, respectively one of the lowest and one of the highest in the world. Even though in all OECD countries the number of people over60 is expected to rise, the Italian case is particularly severe.  The dependency-ratio (i.e., number of elderly versus the working age group) will increase over the years from the 21% reported in 1990 to the 30% expected in 2010 and the 48% expected in 2030 (Franco, 2000). Since the elderly typically require more health care than younger members of the population and are no longer active in the labor market, the increase in the relative share of the elderly has major policy implications (Brugiavini, 2002).

A main constraint faced by Italian policy makers regards the huge public debt accumulated by the country in past decades. Attempts to reduce it drastically have so far failed, even though it was somewhat reduced at various stages in order to meet the requirements first of the Maastricht Treaty and then more recently of the Stability and Growth pact. Controlling the future development of public finances emerges, thus, as a primary need in order to fulfill the requirement of the European community and to avoid a financial crisis. From a macroeconomic perspective what emerges, is that the share of pension spending on the GDP has continued to rise in recent decades (figure 1.1). Due mainly to monetary policy, restrictive budgets and also to the slow economic growth that have characterized the Italian economy in the late ‘90s, the pension expenditure is now one of the highest in the western hemisphere even though Social Security expenditure as a whole is below the European average (Ferrera, 1998). This figures as suggested by Brugiavini and Fornero(1998) point to the “widespread use of public pensions for general welfare provisions” at the expense of other forms of support. As Franco (2000) stresses “the reform of the pension system is at the core of the effort to ensure fiscal consolidation and long-term fiscal sustainability.”

The need of further implementing the first reforms undertaken is widely recognized by public opinion; many polls suggest Italians are not satisfied with the current architecture of the social security system (Ferrera 1998). As for other major reforms (liberalizations etc.) though, in the end these are often opposed, when they reach the parliament, by large stakes of the population that fears the loss of privileges granted by the status they retain in society in favor of others. An old argument, that once more underlines the difficulty of transforming systems where equilibrium as been established. Politicians are tempted by short-sighted policies aimed at gaining votes and not disturbing anybodies “sensibility”, with the final result of further delaying structural reforms. Hence, it is important to evaluate the effects of the introduction of specific changes on the behavior of economic actors in order to quantify the impact on the economy as a whole. Indeed, as many authors have underlined, potential distortions could reshape saving propensity and labor supply. Further, the competitiveness of the economy could be profoundly affected, depending on the reaction of firms to changes in payroll taxes and severance pension regulation.

The goal of achieving long-run fiscal sustainability leads to a broader issue that involves the structure of society and in particular the relationship between different generations.  To deal with distortion, a sound system should aim at reaching both intergenerational equity and intragenerational equity (Brugiavini, 2001). As Fornero (2006) points out both generosity and certainty that characterize the Italian public pension system have a major problem: they sustain them selves by transferring a huge burden to future generations. This point foreshadows the intergenerational responsibility old generations face toward their sons. Between 2010 and 2030 very generous Italian pay-as-you-go pension scheme will provide to the retiring baby boomers generations, benefits well above the value of past contributions. Thus the deficit accumulated by PAYG scheme will be transferred to younger generations, which will sustain pension payments to the elderly trough out higher taxes and lower pension benefits. Demographic and economic growth would have helped payout the system deficit, but as we have seen both are nowadays unrealistic. The contribution-defined scheme, now operating for new workers, wont be able to guarantee pension benefits like those granted in the past; hence the need to raise retirement age (“scalone”) and to add to the public system a private pension pillar (Fornero 2006).

diagramma(3)

Source:  Baldini, Mazzaferro and Onofri 2002.

Autore: Carlo

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