Conclusions

5) Conclusions

The Italian pension system runs on a mature pay-as-you-go scheme characterized by structural financial unbalance. Concerns related to the financial sustainability as well as on the efficiency and fairness of the system inspired the first major reforms of the 1990s and its ameliorations undertaken subsequently. The huge unbalances inherited from the past were somewhat tackled: liabilities were cut down, privileges were reduced, and a higher degree of redistribution was guaranteed. However like Brugiavini and Fornero (1998) stress, since both reforms have “largely safeguarded pension rights of present workers” the burden of adjustment will have to be paid out by the young and future generations. The positive effects resulting from implementing the measures adopted will then also be attenuated by established adverse demographic and economic trends. Brugiavini (2006) further underlines the need to proceed in the implementation of second funded pillar; otherwise, she concludes, the first reforms undertaken will no longer have had sense.

The need to ensure higher levels of replacement rates from those the system will prospectively be able to ensure (35-40%), made already possible to shorten the transitional period before a shift towards a more privately funded pension system, financed with TFR contributions, would have been activated. But since younger generation will receive lower public pensions it is very important they are offered as soon as they enter the labour market a reliable pension plan that can combine both a public and a private pillar. Adopting the latter would guarantee higher replacement rates, since the returns achievable on the financial market would offset the loss of remuneration connected to a mature public first pillar. In the long run a gradual re-equilibrium of the contribution rates should thus be undertaken in favour of private funds. That should be enacted by lowering the rate of contribution to the first pillar and by consequently increasing the one to the second pillar.

The creation of a competitive market for pension funds, till now extremely undeveloped, will guarantee a sounder allocation of financial assets, with beneficial effects to the economy as a whole. Pension funds seeking high returns on investments, would direct funds to the productive realities of the country, thus contributing trough a mechanism of positive selection to ensure to the Italian economy the needed dynamism and competitiveness. Privatizing specific features of the social security system can hence lead to significant growth effects and substantial increase of labor supply. What must be underlined is that proposals for future development of the pension system do not involve privatizing the entire system, but account instead only for a gradual increase of the role retained by supplementary funds. The state trough the first pillar would still influence income redistribution, guarantee disability pensions and means tested income transfers, hence retaining the financial instruments needed to perceive its social justice goals. Governments while restructuring the system will not necessarily face a trade off between efficiency and equity, if the former will guarantee consistent higher replacement rates as well as a more effective institutional organization. Benefit accruing from a newly sustainable system and from widespread efficiency gains will, in fact, lead to greater intergenerational equity among young and future generations.