Legislation on social security and pensions reform approved

Download article in original language : IT0303305FIT.DOC

In February 2003, the Italian Chamber of Deputies approved a proposal for a 'proxy law' reforming the social security system, and notably pensions. The key features of the proposed law include the liberalisation of the retirement age, new economic incentives to encourage people of pensionable age to remain in work, reduced social security contributions for newly-recruited workers, and support for supplementary pension schemes. The bill now passes to the Senate, where its definitive approval appears a foregone conclusion. All the trade union confederations have declared their opposition to the reform.

On 27 February 2003, a bill on a 'proxy law' (whereby parliament delegates to the government the power to legislate on particular issues) on reform of the social security system, and notably pensions (IT0201277F), was approved by the Chamber of Deputies, with 248 votes in favour and one against, while the opposition parties walked out of the chamber in protest. The bill will now pass to the Senate, where no major amendments are envisaged and approval appears a foregone conclusion, given the government’s large majority in the upper chamber. The reform is scheduled to pass into law by June 2003. The bill was signed by the Ministry of Employment and Social Policy together with the Ministry of Economy and Finance.

Background

According to official data published by the State Accounting Office (Ragioneria Generale dello Stato), part of the Ministry of the Economy, and data collated by Eurostat and other international bodies, in 1999 social security expenditure in Italy amounted to 17% of GDP, compared with a EU average of 12.3%-12.4%. Expenditure on pensions in particular is higher in Italy than in all the other EU Member States. In 1999, 64% of Italian social expenditure was taken up by pensions, while the EU average was 46% (IT0302307F).

However, the above figures have recently been disputed by the under-secretary at the Ministry of Employment, Alberto Brambilla, a former member of the board of the National Social Security Institute (Istituto Nazionale Previdenza Sociale, INPS). On 19 February 2003, Mr Brambilla issued a report which claims that social security expenditure in Italy is in fact overestimated, because it also comprises social welfare spending on invalidity benefits, early retirement, 'reversibility' (the proportion of the pension transferred to the beneficiary’s survivor) and the benefits paid to supplement low pensions. Mr Brambilla’s 'reclassification' of social security expenditure (also based on the 1999 data) finds that what it defines as 'pure' social security expenditure - ie net of outlays on welfare benefits - amounts to 11.5% of GDP.

The reform

The proposed proxy law on social security reform comprises eight articles. Article 1 (which covers compulsory and supplementary social security) lays down the main principles of the reform, while the remaining articles stipulate procedures for the reorganisation of the public compulsory social security bodies, the collection and management of data on workers enrolled with the INPS, and provisions regarding privatised social security institutes. The document concludes with the stipulation that, within 18 months from enactment of the law, a consolidated text on social security matters shall be issued in order to complete the process of separating welfare from social insurance.

The main aims of the reform law are to: liberalise the age of retirement; introduce incentives for working after reaching pensionable age; reduce labour costs; and promote supplementary pension insurance, which is still under-used by employees. The main features of the reform are as follows.

  • Liberalisation of the retirement age. In line with EU recommendations, the bill provides that, by prior agreement with the employer, a worker entitled to an old-age pension may continue to work. At present the pensionable age is fixed by law at 65.
  • Incentives. The law provides for the introduction of 'fiscal and contributory schemes that make it economically convenient for workers entitled to a seniority pension [ie a pension based on the number of years worked and not on age] to continue in work'. In practice, those who continue to work despite reaching pensionable age will benefit financially from a special contributory regime involving a total exemption from social security contributions for both the worker and the employer. Half of the contributions saved go to the worker, who may decide to pay them wholly or partly into a supplementary pension scheme, while the other half is used to reduce the employer's labour costs - although this is possible only if the worker undertakes to remain in work for at least another two years. Moreover, the reform law undertakes gradually to increase the possibilities for combining a seniority pension with income from work, a possibility already envisaged by the 2003 state budget law (IT0211104F). Finally, workers who intend to take up the incentives for remaining in work after becoming entitled to a pension will not be subject to the usual practice of dismissal at retirement age, followed by rehiring on a new contract. The employment relationship will instead continue automatically.
  • Support for supplementary pension funds. In order to encourage workers to pay into supplementary (non-public) pension funds (IT0104184F) - which take the form of either 'closed' funds run by trade unions and companies or 'open' ones set up by banks, insurance companies or other private organisations - the law provides that accruing end-of-service allowance s (Trattamento di fine rapporto, Tfr - a portion of a worker's pay set aside by the employer and then paid as a lump sum at the end of the employment relationship) must compulsorily be paid into a supplementary pension fund, except when the worker has 'particular exigencies'. The current legislation on the matter does not contain any obligation for the Tfr to be pay into supplementary pension funds, which workers join on an explicit and voluntary basis. Finally, the law establishes an equivalence between closed and open supplementary pension funds, whereas at present workers may join an open fund only if a closed one does not exist in their company or industry.
  • Reduction of labour costs. The bill reduces the social security contributions paid by the employer for workers newly recruited on open-ended contracts by up to 5 percentage points. This contributions reduction for specific categories of newly hired workers 'will be defined upon enactment of the proxy law'.

Reactions

The three main trade union confederations - 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) - have been highly critical of the reform law. They have thus decided to draw up a joint document on the issue to be submitted to the government. The unions are critical of two provisions in particular. The first is the the cut in social security contributions payable for newly-hired workers, in order to reduce labour costs. According to the unions, this may reduce the revenues accruing to the social security institutes, with the risk that future pensions will drastically diminish. The other point contested by the unions is the compulsory payment of the Tfr allowance into a supplementary pension fund. The unions are in favour of a non-compulsory transfer of the Tfr for this purpose, conditional on a voluntary decision by the worker. This could also take the form of 'silent assent' whereby, in the absence of explicit refusal by the workers concerned, there Tfr would automatically be paid into a supplementary pension fund. The unions have also demanded that the supplementary pension funds should guarantee a minimum yield at least equal to that at present ensured by the INPS.

By contrast, Confindustria, the largest Italian employers’ association, has criticised the reduction in social security contributions for new recruits as too small, maintaining that there should be a minimum reduction of 3 percentage points, as originally stated by the text of the bill, which was subsequently modified by the parliamentary budget committee to remove the minimum reduction.

Commentary

The proposed reform has the merit of incorporating EU recommendations on liberalisation of the retirement age. A positive assessment can therefore be made of its provisions concerning tax relief and reduced contributions for those of pensionable age wishing to continue to work, the possibility of combining a pension with income from work and the automatic continuation of the employment relationship (without dismissal and rehiring) once pensionable age has been reached.

Also positive is the intention to promote supplementary pension funds, which in Italy are still underdeveloped because of the small number of workers enrolled. However, the instrument used by the government to this end, namely the compulsory payment of the Tfr into a pension fund, is open to criticism. The government has not given guarantees regarding private supplementary pension funds, the yield of which depends on trends in the financial markets and the stock exchange. This is a cause of concern in a situation of financial uncertainty such as the present one.

According to the government, social security contributions will be reduced for newly-hired workers in order to create employment. In reality, however, the purpose of the change seems to be that of aiding employers, which will no longer be able to rely on the financial resource constituted by the accumulated Tfr entitlement of their employees, given that it will now be paid directly into a supplementary pension fund. The reduction in contributions may jeopardise the public accounts, because the unpaid contributions may have an impact on public revenues.

Finally, the reform law does not adequately address the question of the separation between welfare and social security (in the strict sense). These are not managed separately but are instead jointly administered by the INPS, with the consequence that severe inefficiencies arise in the management of social expenditure, whose itemisation still lacks transparency. (Livio Muratore, Ires Lombardia)

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment