Parliament approves pension reform law

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In July 2004, the Italian parliament approved a 'proxy law' on reform of the pension system. The main changes include reduced access to early retirement on 'seniority pensions' (based on length of contribution history), new ways of financing supplementary pension funds, and incentives to encourage people of pensionable age to remain in work. The reform has proved highly controversial among the social partners.

In July 2004, after two years and seven months of talks, parliament finally approved the 'proxy law' (a measure whereby parliament delegates to the government the power to legislate on particular issues) on the reform of the pensions system (IT0309203F, IT0303305F and IT0311102N). This should allow the government to issue, during the next 18 months, legislative decrees to implement changes to the pensions system and thereby reduce Italy’s pension expenditure by 0.7% of GDP by 2008.

The last major reform of the pension system, the 'Dini' law (no. 335 of 1995) named after the then Prime Minister, was approved in 1995, following an agreement between the government and the trade union confederations but without the support of Italy’s main employers’ organisation Confindustria. The 1995 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. New rules were also introduced on earlier retirement for those with at least 35 years' contributions.

Under the terms of the Dini law, an assessment of pension expenditure had to be carried out in 2005, with the main objective of reducing the impact of the imminent retirement of the 'baby boom' cohort of workers. The current centre-right government decided, on its own initiative, to launch a reform of the pension system before the pre-established date. Its proposals, announced in 2003, were rejected, on different grounds, by both trade unions and employers’ organisations.

Positions of the social partners

The trade unions did not accept the government's proposals and in particular those:

  • ending the possibility of workers retiring at the age of 57 if they have paid 35 years of pension contributions;
  • promoting 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 a supplementary pension fund;
  • ending tax relief for supplementary pension funds based on collective agreements; and
  • introducing a 3 percentage point cut in employers' social security contributions in respect of newly-hired workers, in order to compensate companies for the loss of use of the accumulated Tfr end-of-service allowances that they save on behalf their employees, which currently represents an important source of funds for companies.

The unions did declare themselves willing to put in place a policy to encourage workers, on a voluntary basis, to postpone retirement.

The trade unions' consistent opposition to the government's pension policy has been a source of unity of action among the three main confederations, even during periods of major divisions - such as the signature of the July 2002 'Pact for Italy' (IT0207104F), an agreement on the labour market, the tax system and the South of Italy signed by the government, employers’ organisations, the Italian Confederation of Workers' Unions (Confederazione Italiana Sindacato Lavoratori, Cisl) and the Union of Italian Workers (Unione Italiana del Lavoro, Uil), but not the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil).

Confindustria and the other employers’ organisations did not believe that the government's proposals were sufficient to guarantee the sustainability of the pensions system. The employers called for the immediate adoption of the contributions-based system for calculating pensions, fully replacing the earnings-related system, rather than retaining the latter for workers who had paid at least 18 years of contributions, as proposed by the government. Employers also wanted an increase in the retirement age, a reduction of 'seniority pensions' (pensioni di anzianità) based on long contribution histories, and a reduction in social security contributions, considered as an excessive tax on labour. Social security contributions in respect of dependent employees amount to 32.7% of employees’ gross remuneration (8.89% paid by the employee and 23.81% paid by the employer) and are among the highest in the EU.

Positions of political parties

The pension reform issue caused profound divisions between the ruling centre-right majority and the opposition centre-left coalition, and within the coalitions themselves.

Within the centre-right coalition, the Northern League (Lega Nord) opposed the reform plans. The League had previously supported pension reform in exchange for support within the coalition for the federal reform (IT0212107F) that is the party's core objective. However, on this occasion, the League declared itself against the reduction of seniority pensions. The majority of workers in Northern Italy usually start working at a relatively young age and are those who benefit the most from seniority pensions. Nevertheless, guarantees from Prime Minister Silvio Berlusconi, who promised the Northern League the approval of the federal reform before autumn 2004, resolved the situation. The government also held a vote of confidence on the pension reform law. While this was justified in reference to 'stonewalling' by the opposition, it turned out to be very useful in consolidating the governing parties and overcoming their internal divisions.

The approval of the reform was seen in some quarters as a response to criticisms of the government's economic policy and, in particular, against its numerous one-off measures. A recent decrease in Italy's public 'credit rating', as assessed by the Standard and Poor agency, raised concerns about the credibility of the government's policies on the international financial markets. The reform of the pension system and the new direction in economic policy marked by the 2005 'national budget report' (IT0408105N) - which will be implemented by the 2005 state budget law in autumn 2004 - are seen by some observers as attempts to restore the credibility eroded by three years of 'creative financing' and one-off measures.

The parties of the opposition were initially divided about the government's proposals. Moderate 'reformist' groupings repeatedly asserted the need for action to correct the upward trend in the expenditure of the pension system, but to be implemented in agreement with the trade unions under the terms of the assessment of the Dini law scheduled for 2005. The more radical left-wing parties questioned the need to amend the current pension system, refusing any possibility of dialogue in parliament with the governing coalition parties.

The development of the political climate and the government's decision to seek a vote of confidence over the reform law appeared to prevent any realistic possibility of dialogue and collaboration among the political parties in parliament aimed at improving the reform.

Main points of reform

The measures that the government intends to implement, in compliance with the contents of the proxy law, will not overturn the basic structure of the pension system but have two key aims: raising the average actual retirement age, which is considered too low even if it is currently in line with the EU average (59 years and few months); and promoting supplementary pension insurance, in order to support the public system and help it sustain pension expenditure. The proxy law provides a framework within which it will be possible to undertake a series of actions and changes.

Seniority pensions

'Seniority pensions' are the area that will change most under the reform. Until 2007, to be entitled to a seniority pension workers must be at least 57 years of age and have paid at least 35 years of contributions. They receive a pension equal to 70% of the average of the five 'best years' of highest earnings during their last 10 years of work.

From 2008, the age for receipt of a seniority pension will progressively change. From 2008 to 2010, employees must at least 60 and have paid 35 years' contributions to qualify. Self-employed workers (artisans, tradespeople, farmers etc) must be at least 61 years and have paid 35 years' contributions. All workers will be able to retire, regardless of age, when at least 40 years of contributions have been paid.

From 2010 to 2014, employees will qualify for a seniority pension from the age of 61 (62 for self-employed workers) with 35 years' contributions, increasing to 62 (63 for the self-employed) from 2014, still with 35 years' contributions. The possibility of retiring, regardless of age, with 40 years of contributions will remain. Moreover, by prior agreement with the employer, workers aged over 65 may continue to work

The law provides for more favourable criteria for women workers to receive a seniority pension, despite women’s average life expectancy being higher then men's. Women will still be able to retire if they satisfy the current pension requirements (57 years of age or 35 years of contributions) after 2008. In this case, they will receive a contributions-based pension, which may mean a significant reduction in the amount of the pension received.

The proxy law also provides for a reduction in the number of 'exit windows' ('finestre') (IT0309203F): when a worker has fulfilled the requirements for a seniority pension, he or she must wait until an exit window, which fixes the start date of the pension. By law, there are currently four such windows per year, at the beginning of each quarter. From 2008 onwards there will be only two windows a year, achieving an important reduction in pension expenditure.

Incentives to remain in work

The proxy law introduces incentives to encourage people of pensionable age to remain in work. Until 2007, private sector employees entitled to a seniority pension or with at least 38 years of contributions, regardless of their age, will be able to decide to postpone their retirement and receive directly in their pay-packet the full social security contributions saved - ie 32.7% of gross pay. This amount will not be subject to taxation. When the worker does retire, the pension will be calculated on the basis of the entitlement accrued at the point when the worker decided to remain in work past pensionable age.

Certification of entitlements

The law provides for the 'certification of acquired pension entitlements' (certificazione dei diritti acquisiti) in order to prevent workers worrying that they will lose their rights due to the continuing changes in the pension system, and thus deciding to retire early. This certification, issued by pensions institutions, will allow workers entitled to a seniority pension before the coming into force of the new regulations to use these acquired rights at any time and request their pension according to the regulations in force at the moment of the certification.

Supplementary pensions

The most innovative part of the reform refers to supplementary pensions (IT0104184F). The new law increases the number of institutions able to establish supplementary pension funds - regional authorities, for example, will be able to establish funds for the workers resident in a particular region. In order to strengthen the supplementary pension system, employees’ accumulated end-of-service allowances (Tfr) will be paid into a supplementary pension fund, on the principle of 'silent approval'- ie this will occur unless they explicitly request otherwise. Employees will have six months to decide whether to pay their Tfr into the 'closed funds' run by trade unions and companies or the 'open funds' run by banks, insurance companies or other private organisations. If the employee does not specify a fund, the Tfr will be paid, presumably, into a regional fund. Only in case of an explicit request will the Tfr be left in the company's coffers and serve its original purposes.

The proxy law also provides for equal tax treatment on the benefits paid by open and closed funds, ending the preferential treatment of the latter.

Other developments

The Minister of Labour, Roberto Maroni, has stated that, from September 2004 he will invite the social partners to collaborate in the development of the decrees implementing the proxy law. The Minister has also announced the possible establishment of a commission to draft a 'Single Act' on pensions, whereby there would a total harmonisation of treatment between workers in the public and private sectors. According to Mr Maroni, equality of contributions should correspond to equality of benefits. The Minister has also not excluded the possibility of reducing the number of 'exit windows' (see above) starting from 2005, in order to find earlier savings in pension expenditure.

Social partner reactions

The employers' organisations did not make any comments on the approval of the proxy law in July although, in the past, they had voiced many criticisms about the abolition of reductions in employers' social security contributions in respect of newly recruited employees.

The trade unions have expressed their total disagreement with the reform, opposing its timing and contents. During autumn 2004, several issues will probably cause divergences between Cgil, Cisl and Uil and the government - economic policy, the pensions reform and the renewal of several major collective agreements, especially for public sector workers. The possibility of launching common trade union initiatives largely depends upon the achievement of a united position on reform of the collective bargaining system, which was one of the reasons why in July 2004 Cgil walked out of negotiations with Confindustria over a possible national agreement aimed at boosting the country’s competitiveness and economic development (IT0408106N).

Assofondipensione, an organisation that represents the collectively agreed supplementary pension funds in the private sector, has criticised aspects of the proxy law. Assofondipensione, which acts as a technical body, reflects the opinions of private sector employers’ organisations and trade unions. It criticises the new equivalence of tax treatment between closed (ie collectively agreed) and open supplementary pension funds, and believes that the Tfr should be paid into an open fund only if a closed one does not cover an employee’s company or sector.

Commentary

Many independent observers claimed that the approval of the proxy law on pensions reform was the result of international pressures rather then the independent will of the government and the governing coalition which, on this issue, has always been divided. On the other hand, observers have welcomed the fact that the law finally permits the full development of a supplementary pensions system, thanks to the introduction of the 'silent approval' principle concerning the payment of employees' Tfr into supplementary funds - a move hitherto opposed by the trade unions.

The approval of the proxy law, after a long and difficult parliamentary passage and lengthy discussions among the social partners, has launched but not completed the reorganisation of the obligatory state pensions system, a contributions-based system which still needs major resources from the state budget. During the next few years, the government will need to take further action to harmonise the pensions treatment of public and private sector workers and to tackle two other problems neglected by the law.

The first issue to be addressed is the current imbalance between the social security contributions paid by dependent employees and self-employed workers. The pensions of tradespeople, artisans and farmers weigh very heavily on the finances of the National Social Security Institute (Istituto Nazionale Previdenza Sociale, Inps). This problem could be resolved though a steady growth in pension contributions, an unpopular measure which cannot be postponed forever.

The second issue concerns the situation of 'atypical' workers. The contributory situation of these workers is very far from that of 'normal' dependent employees and there is no certainty that the social security contributions they pay will be turned into pensions in the future. Due to a lack of effective 'social shock absorbers' (ammortizzatori sociali) for them, atypical worker pay contributions only during the periods of work while they are completely uncovered during periods of inactivity.

A better relationship between trade unions and government on this issue could have led, according to some observers, to trade-offs between them, combining saving on pensions expenditure with a reform in favour of the increasing number of workers hired on am atypical basis. However, the continuing clashes between the government and the unions have prevented negotiations over this problem which, in future, will be source of serious social concern.

It is very clear that the problem of sustainability of the Italian pension system, regardless of the new reform law, will remain on the country’s social and political agenda, engaging the social partners and the government for a long time to come. (Domenico Paparella, Cesos)

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