Government seeks further structural reform of pension system

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Reform of the pension system is again one of the Italian government's top priorities in September 2003, in the context of discussions on the 2004 state budget law. In order to curb spending on pensions, the government intends to modify key aspects of the system. It proposes to: raise the retirement age; introduce incentives to encourage people of pensionable age to remain in work; pay employees' end-of-service allowances into a supplementary pension scheme; and curtail the advantages of workers covered by special pension schemes. Some aspects of the reform will be subject to dialogue with the social partners, which are largely opposed to the changes proposed.

In April-May 2003, the present centre-right government drew up a bill for a 'proxy' law (whereby parliament delegates to the government the power to legislate on particular issues) on reform of the pension system, which is currently being discussed by the senate (IT0303305F and IT0305102N). A variety of factors were behind this move, including: recommendations by international organisations such as the European Commission, the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF); demographic trends - forecasts indicate that in 2050 Italy will be the 'oldest' country in Europe, with six out of 10 people aged over 65; and the high level of expenditure on pensions - expected to reach 16% of GDP by 2003.

The proposals for reform moved to the top of the government’s agenda at the beginning of September 2003, when discussion began on the budget law for 2004. Inclusion of measures to reform the pension system in the budget law may considerably accelerate the parliamentary debate and approval of the measures.

Pension reforms during the 1990s

The 1990s saw several reforms of the Italian pensions system. In 1992-3 - in the midst of a financial and currency crisis - the government headed by Prime Minister Giuliano Amato undertook the first measures to reform the system, for immediate reasons (ie to cut costs) and more medium- to long-term ones. These measures included increasing the number of years used to define the 'benchmark' average income for calculation of the state retirement pension, and encouraging and regulating supplementary pension schemes (IT0104184F).

These changes, however, were only fully implemented with the 1995 'Dini' reform law (no. 335 of 1995), named after the then Prime Minister, which was the result of an agreement with the trade union confederations. The main structural measures which were introduced at this stage to counteract the medium-term tendency for expenditure on pensions to grow concerned retirement age and the system used to calculate pensions. Specifically, Article 1 of the Dini reform law provided that state pensions should be calculated on the basis of contributions actually paid (the 'contributions-based system') rather than on the basis of income earned during the final years of the career (the 'earnings-related system'). The new system applied only to dependent and self-employed workers starting work after 1 January 1996. For those who had paid at least 18 years of contributions by that date the previous earnings-related system still applied, while a mixed system was introduced for the existing workers with a shorter contribution history.

Since the Dini reform law, therefore, two basic kinds of state pension have existed: the contributions-based old-age pension and the earnings-related one. Entitlement to the earnings-related pension is acquired on reaching the age of 65 for men and 60 for women, with a minimum of 20 years of contributions. Moreover, before fulfilling the requirements for an old-age pension, people in the earnings-related system may be entitled to another type of benefit, the so-called 'seniority pension' (pensione di anzianità), which is open to workers who have reached 57 years of age and have paid 35 years of contributions. Workers in the earnings-related system may also gain access to a seniority pension on the basis of contributions alone: in 2003, 37 years of contributions are needed, a threshold which will progressively reach 40 years from 2008 onwards. Entitlement to the contributions-based old-age pension is acquired on reaching the age of 57 years for both men and women who have at least five years of contributions (or regardless of age, when at least 40 years of contributions have been paid). The method of calculation ensures that pensions reach their maximum level when retirement takes place at 65.

When a worker has fulfilled the requirements for a seniority pension, she or he must wait during a period called the exit 'window' (finestra) which fixes the start date of the benefit (by law there are four 'windows' per year, beginning with each quarter). The gradual changeover from the earnings-related to the contributions-based system of calculation should be accompanied by the introduction of supplementary pension funds (IT9806228F). In quantitative terms, the general application of the new calculation system - scheduled to come into force in 2065 - will introduce pensions amounting to 50%-60% on average of the final income from work. It is for this reason that it is now seen as necessary to devise instruments which integrate the various pensions paid by the public social security institutes (IT0104184F).

The government’s initiative

The gradual entry into force of the Dini reform law, and delays in creating the 'second pillar' consisting of supplementary pension schemes, are the main reasons cited by the government for its present endeavour to reduce expenditure on pensions. The measures now proposed by the Ministry of the Economy and the Ministry of Labour and Social Policy are the following.

1. Acceleration of the Dini reform from 2008 onwards. Under this proposal, by 2013 or 2016 (according to a 'graduality mechanism') there will be only two forms of pension benefit on retirement: the old-age pension paid at the age of 65 to men and at 60 to women, or a pension based on 40 years of contributions regardless of age.

2. The introduction of a 'super-bonus', equal to one-third of gross pay, for all workers fulfilling the requirements for a seniority pension who decide to stay in work. This bonus will derive from discontinuing the payment of pension contributions and transferring this amount to the worker. This will involve a freeze of the pension which will be paid at the time of retirement. Still to be determined is whether the bonus should be conditional on continuing to work for at least one year.

3. The immediate payment of the end-of-service allowance (Trattamento di fine rapporto, Tfr - a portion of a worker's pay [around 8%] set aside by the employer and then paid as a lump sum at the end of the employment relationship) into pension funds, according to the procedure set out in bill for the 'proxy' law currently being discussed by the senate. The transfer will be automatic: the workers concerned can decide only whether the money is to be paid into a 'closed' fund (set up by collective agreement and restricted to workers in a particular sector) or an 'open' one (promoted by institutions permitted to operate pension funds and intended mainly for self-employed workers and professionals).

4. Curtailment of the privileges currently enjoyed by so-called 'special' pension schemes. This applies to employees of the Bank of Italy, army officers, magistrates and personnel of the regional administrations, and the special funds of the National Institute of Social Insurance (Istituto nazionale per la previdenza sociale, Inps).

5. Revision of, and tighter controls on, invalidity pensions. Measures will be introduced to detect and punish 'bogus' claimants, as well as a system to reduce the enormous amount of litigation which causes Inps to lose considerable sums of money.

6. An increase, from 2004, to 19% of earnings (compared with the current 12%-14%) in the pension contributions paid by 'employer-coordinated freelance workers' (IT0308304F) and by the 'project workers' envisaged by the recent law reforming the labour market (IT0307204F).

7. During negotiations with the social partners, the government may decide no longer to allow (or to penalise) the combining of a seniority pension with other income from work.

8. Another structural measure concerns pension contribution reductions in respect of newly-hired workers (in the private sector). Reducing contributions by at least three percentage points for these workers would decrease the amount of the Inps pension. However, this reduction, according to the government, would be amply offset by supplementary pensions, which would be augmented by the compulsory transfer of the end-of-service allowance to the pension fund.

9. A possible reduction of the seniority pension 'windows' for 2004 from four to two.

10. The introduction of a levy (of 2%-3%), known as the 'solidarity contribution' (contributo di solidarietà), on 'golden pensions', ie those amounting to more than EUR 10,000 a month.

The positions of the social partners

Despite some differences of opinion, the political parties making up the government coalition have reached agreement on three essential points of pensions reform to be discussed with the social partners. These three points are: (a) strong incentives for people qualifying for a seniority pension to remain in work; (b) from 2008, raising the requirement for entitlement to a seniority pension to 40 years of contributions; (c) encouraging supplementary pension schemes. However, the social partners have already reacted negatively to the government’s proposals.

Confindustria, the major Italian employers’ association, has rejected the proposed reform of the pension system on the grounds that it is too mild. It is especially critical of the system of incentives to remain in work, maintaining that it will not significantly affect the propensity to retire and therefore the economic benefit of delaying exit from work. The employers consider indispensable a more radical reform, as part of an economic policy that supports development, based on a system of disincentives to retirement, combined with the incentives proposed by the government. In particular, Confindustria believes that incentives and disincentives should be combined in a balanced manner, with pension benefits adjusted according to whether they are paid before or after a certain age. The proposal is that pensions should be reduced by 3% for each year a person retires prior to the age of 62.

The trade union confederations are unanimous in their hostility towards any kind of structural reform of the pension system. The general secretaries of the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil), the Italian Confederation of Workers' Unions (Confederazione Italiana Sindacati Lavoratori, Cisl) and the Union of Italian Workers (Unione Italiana del Lavoro, Uil) maintain that the system has already been sufficiently reformed by the Dini law, and that no further action should be taken until 2005, the year in which the Dini reform is scheduled for review. The unions therefore argue that changes to the pension system are not necessary at the moment, claiming instead that the measures proposed by the government are intended only to raise funds for the 2004 budget law. The unions also state that the constant, and rather contradictory, rumours which have emerged from members of the government only create confusion and alarm among workers, with the consequence that applications for seniority pensions have increased. Moreover, the unions are critical of the method used by the government and maintain that not enough time has been allocated to discussion with the social partners: the schedule for definition of the reform, which should flank the budget law without being directly part of it, will in practice reduce the time for discussion to less than one week. In any case, Cgil, Cisl and Uil have announced that if, during discussions, the government confirms the leaks that have emerged, they will not hesitate to undertake every form of industrial action. Cgil, moreover, does not exclude the possibility of a united general strike.

Commentary

The pensions issue is one of the most complex and controversial aspects of the process of remodelling the Italian welfare state. It should be noted that the Italian welfare system suffers from delayed 'maturation'- as maintained by the labour law academic and former labour and transport minister, Tiziano Treu - in that it was created in the late 1960s and the early 1970s, when almost all the structural elements of the 'welfare crisis' were beginning to emerge and to induce reforms throughout Europe. These elements are: rapid ageing of the population; growing uncertainty and a slowdown of economic growth; changes in technology and markets; widespread unemployment and progressive segmentation of the labour market; and changes in the composition of families (with especially serious effects on the 'welfare balance' in those Mediterranean countries traditionally centred on the family). It is this delayed maturation which has exacerbated the difficulty of undertaking reforms, 'since a change in direction involves an overturning of expectations which have just been met, after having been grown and diffused in the whole society' (in the words of Politiche del lavoro, Tiziano Treu, Il Mulino, 2001).

As seen above, after approval of the Dini reform law, which introduced major structural changes in the Italian social security system, discussion today centres on the timing of transition to a contributions-based pension system. The forecasts for pension spending over the next 30 years seem to make advisable a rapid changeover from the present, largely earnings-related system to a universal contributions-based one, providing incentives to workers to stay in work and thereby delaying their exit from the labour market. In activating this process, the method is of crucial importance. When the living conditions and expectations of millions of people are at stake, gradual step-by-step reforms, which avoid improvisation and drastic measures and involve the social partners in the whole process, are preferable. Moreover, it is likely that only the devising of measures which reduce expenditure on public pensions within a broader process of balancing the various items of welfare expenditure - such as welfare benefits and allowances, investments in training and the introduction of an efficient system of 'social shock absorbers' (the measures which seek to protect workers affected by job losses and restructuring - IT0205204F and IT9802319F) - can make it possible to face the issue of pension reform without the risk of reducing it to a conflict marked by strong and counterproductive ideological features. (Diego Coletto, Fondazione Regionale Pietro Seveso)