The basic structure and its development

2) The basic structure and its development

The Italian pension system is based on a mature pay-as-you-go scheme, constructed around three pillars. The first and essential one, although in deficit, covers the majority of the work force (almost all private sector employees and all public sector employees) and is financed through a PAYG (Pay-As-You-Go) method. The remaining forms of insurance provide additional coverage outside the public program. When pension funds are not substitutes for public schemes, they are generally fully funded and not mandatory. Thus, only the first pillar is entirely financed on a PAYG basis, while the second pillar (occupational pensions and firm plans) has just begun, and the third pillar, private individual contracts, basically does not exist (Table1).

The resources deployed in the system come from the contributions of employers and employees, which account for 33% of the workers’ salary.  The individual pension level is determined by the individual amount of contributions capitalized at the rate of change of the nominal GNP. However, outlays exceed revenue, and the resulting deficit is financed by the central government. The entire structure of the system, is run by several institutions, the most important of which, INPS (Istituto Nazionale della Previdenza Sociale), insures around 70% of those working in the labor market. INPS is responsible for several different funds; the largest is the FPLD (Fondo Pensioni Lavoratori Dipendenti), which insures 90% of the workforce in the private sector.

The public pension system was transformed into a pay-as-you-go system in 1952 and then fully developed between 1957 and 1968, the years in which Italy registered strong economic and demographic growth. Up until 1969, in fact, the system financed exclusively the pensions of those working in the public sector. At this time, it was extended to include the pension plans of self-employed and disabled workers and elderly people with low incomes. During these decades, social security expenditure was consistently expanded, providing income for those working in the agricultural sector, for the disabled, and for elderly workers with insufficient social security contributions.

In fact, these were the years in which the system started accumulating huge liabilities, in which there was an extensive recourse to disability pensions, often used as unemployment benefits and as an instrument of political patronage, and in which no careful evaluation of budgetary costs was carried out (Franco 2001). According to Ferrera (1998), although the “chronic deficit” accumulated by the social security system was partly the result of incorrect accounting, it can also be traced back to two major defects of the Italian social security system: efficiency and legality. The former is the result of widespread abuses regarding eligibility for disability pensions, false declarations aimed at receiving income tested benefits, as well as high rates of tax evasion. The latter addresses the issue of “persisting inefficiencies of the public services” which are the result of an extremely perverse system, organized around very complex administrative institutions.