Government proposes giving end-of-service allowances back to workers

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In order to promote the growth of supplementary pension funds, in autumn 1999 the Italian government has proposed scrapping the end-of-service allowance (Tfr), a part of workers' pay which is put aside and paid in a lump sum at the end of the employment relationship. Two alternatives are being considered: compulsory payment of the Tfr into supplementary pension funds, or its gradual inclusion in workers' pay packets. The social partners are sceptical.

With the state budget law for 2000 under preparation, reform of the pensions system has returned to the centre of discussion between the government and the social partners in autumn 1999. Spending on pensions is already a major item in the Italian public Budget, and it is bound to increase further in view of demographic trends and the increasing average age of the population.

In the spring of 1999, the government announced that it intended to introduce reforms to the pensions system in the budget law for 2000. This announcement provoked a hostile reaction by the trade unions, which declared that they would not discuss the matter until the results of the reforms already introduced by the Dini government in 1995 had been assessed. The assessment is scheduled for 2001. Under these reforms, changes have been made to the way pensions are calculated for workers with less than 18 years of contributions. A final-salary model (based on the average of the employee's last 10 years' wages) has been replaced by a contributory one (based on contributions made). During the summer of 1999, the general secretary of the Cgil trade union confederation, Sergio Cofferati, said that he was in favour of discussions in 2001 on extending the contributions-based method of calculating pensions to all workers, and not just to those with less than 18 years' seniority (IT9909345F).

Thus, although thorough-going reform of the pensions system has been postponed until 2001, the government nevertheless intends to introduce changes in the budget law for 2000. These changes will take the form of cuts in the pensions of certain privileged categories like the employees of the Banca d'Italia, public managers, pilots and members of parliament.

Towards a different use for the Tfr

Among the government's proposals, much discussion has been provoked by the idea of returning the end-of-service allowance (trattamento di fine rapporto, Tfr) to workers (IT9906119N). The Tfr is a distinctive feature of the Italian social security system. It involves setting aside a portion of a worker's pay, which is then paid as a lump sum at the end of the employment relationship.

Exactly how the Tfr will be handed back to workers is still being defined. The government is considering two alternatives:

• compulsory payment of the Tfr into the supplementary pension funds;

• gradual integration of the Tfr into the pay packet. Workers would then decide themselves whether to pay it into their supplementary pensions fund (or other savings schemes) or to spend it, thus increasing consumption.

The aim of the government's proposal is to foster the growth of private pensions funds (IT9806228F). The introduction of supplementary pensions was one of the main innovations in the Dini government's reform of the pensions system. However, the creation of these private funds has to date proceeded rather slowly. The process would be accelerated by the injection of the huge amount of capital released by abolition of the Tfr. To this end, if it is decided that the Tfr will be returned to workers in their pay packets, the government could steer this extra money towards the pension funds by offering tax relief.

There have been mixed reactions by the social partners to the government's proposal. Cgil is largely in favour, although it will wait until the exact form of the proposal is known before passing definitive judgment. According to Cgil, moreover, the restoration of the Tfr to workers should be part of a broader set of initiatives to foster forms of supplementary social security.

Cisl, by contrast, has been highly critical, arguing that, if implemented, the proposal would increase fiscal pressure on workers' pay. Uil too, has raised a number of doubts.

On the employers' side, the reaction by Confindustria was initially highly critical. Inclusion of the Tfr in the pay packet, it argued, would increase labour costs. It would become part of income and therefore subject to social security contributions, whereas at the moment it is exempt. For Confindustria, therefore, reform of the Tfr should be part of a broader and more radical reform of the pensions system which would reduce the contributions paid by firms. Latterly, however, Confindustria has declared its willingness to discuss a different use of future Tfr payments, but not those that have already been set aside.

Commentary

The government's proposal to hand the Tfr back to workers is a major issue in the ongoing debate on reforming the Italian welfare system. The Italian social security system of the future should be based on two components: compulsory public pensions and optional private ones. The growth of supplementary pension funds (both private ones and those established by collective agreements) is a crucial factor in guaranteeing the incomes of future pensioners, given that the amount of public pensions is bound to decline.

Nevertheless, implementing a reform to return the Tfr to workers raises numerous questions.

Firms would lose one of their main forms of financing, in that the sums set aside in the Tfr funds are currently available to them. Consequently, in order to avert liquidity problems for firms, the restoration of the Tfr should take place gradually. This explains Confindustria's willingness to discuss the use of Tfr funds not already set aside. Moreover, if the Tfr is included in the pay packet, this will increase social security payments by firms and therefore the cost of labour.

As far as workers are concerned, inclusion of the Tfr in their pay packets would increase their tax burden, given that it would raise their incomes and the Tfr would be subject to a higher tax rate than at present.

Finally, the details of how the Tfr will be paid back is another crucial issue. Inclusion of the Tfr in the pay packet would boost consumption and therefore aid economic recovery. When the decision is taken, therefore, economic policy priorities will have to be considered alongside reform of the welfare system. (Marco Trentini, Ires Lombardia)