Monti’s £30 billion survival plan

A month after Mario Monti replaced Silvio Berlusconi as Prime Minister, the Italian government approved a €30 billion austerity package to restore confidence in the economy. The so-called ‘Save Italy’ measures introduced major pension reforms, including raising the retirement age and a series of monetary consolidation and growth-enhancing measures intended to ensure a balanced budget by 2013. The moves have led to protests from unions and continuing industrial action.

Background

Mario Monti took over from Silvio Berlusconi as Prime Minister in November 2011 and within a month his government had approved a €30 billion austerity plan to drag Italy out of financial difficulty. The ‘Save-Italy’ decree was an attempt to control public spending and to rapidly reduce the national debt.

To balance the books by the time of the 2013 budget and consolidate public spending, the austerity plan imposes public spending cuts, tax increases including a rise in VAT from 21% to 23%, the reintroduction of taxation on housing and an increase in duty on petrol. The plan also includes some measures to improve competitiveness and encourage economic growth, such as tax relief for enterprises, and policies to encourage free market competition.

Reform of the social security system will be the first step of a more general reform programme currently being discussed by the government and social partners, and which will involve the labour market and a system of social shock absorbers.

Social security reform

The following obejctives will be the basis for reform of the social security system:

  • moves towards a single retirement age for men and women, for employees in both the public and private sectors, and the self-employed;
  • a flexible retirement age, encouraging people to work longer. There will be a minimum and maximum age limit. Pensions will vary according to age of retirement, increasing up to the maximum age limit;
  • periodic adjustment of the retirement age in line with increases in average life expectancy;
  • automatic increases in the retirement age will begin in 2013 with a rise of three months, and there will be further increases every three years up to 2019, and every two years after that;
  • from 2012, enforcement of a defined contribution pension scheme introduced in earlier reforms to replace the earnings-related defined benefit scheme (IT0309203F).

This last objective is intended to the solve the problems caused when the earlier reform was not applied to people who, in 1995, had accumulated 18 years of contributions.

Under the defined contribution pension scheme, an individual’s final pension will not depend on salary levels in the years before retirement, but on the quantity of contributions paid throughout a person’s working life.

It is expected that by 2035, all pensions will be based entirely on contributions.

The new pensions

Under the new system there will be two types of pension, the old-age pension and the early‘ pension’ which can be paid before the to those in the years coming up to statutory retirement age. The seniority pension – allowing workers with at least 35 years of pension contributions to retire early – has been eliminated. A form of seniority pension will remain only for those who do arduous work.

Old-age pension

From 1 January 2012, the old-age pension will be available to those who fulfil three requirements.

  • A minimum statutory retirement age, which will gradually increase (currently 65 years). In 2018, when men and women will retire at the same age, it will be 66 years and seven months. By 2021, it will be 67 years and two months.
  • Seniority contributions of at least 20 years.
  • Sufficient contributions to qualify for at least 1.5 times the social pension (which, in 2011, was €417). Workers who have reached 70 and have seniority contributions of at least five years will not need to meet this requirement.

‘Flexible’ retirement will be possible between the minimum age and 70, although to encourage people to work longer, their pension will be higher the later they retire.

Early pensions

Early pensions will be available to workers who are 63 and over, and who have paid at least 20 years’ contributions. They will be entitled to a monthly pension of no less than 2.8 times the social pension for people who started paying contributions after 1 January 1996.

Early pensions will be available, regardless of age, for men who have paid 42 years and one month of seniority contributions, and for women after 41 years and one month of contributions. These criteria will also be adjusted from time to time to reflect increases in average life expectancy.

Retiring early will mean a reduced state pension. For those who choose to take early retirement at or after the age of 63, there will be a reduction of 1% for every year before the statutory retirement age that an individual begins claiming their pension, and for those taking their pension before the age of 60, a reduction of 2% for each year before statutory retirement age.

Superannuation funds

The superannuation funds of professional freelance workers such as journalists and lawyers will have to apply measures that will re-balance the books in the medium-long term. If there is no voluntary reform of these funds, the defined contribution pension scheme will be applied to all their members from 1 January 2012.

Other measures

Pension freezes

To bring public spending under control, during 2012/2013 pensions above €1,400 will not be automatically adjusted to compensate for inflation.

Encouraging development

A guarantee fund for SMEs will mean access to €20 billion for businesses. A reduction in the tax burden is also planned, particularly for companies that hire people under 35 on open-ended contracts A lump-sum subsidy of €10,600 for each worker is foreseen. In the south of Italy, the allowance increases to €15,200.

Tax rises

There will be tax increases, particularly in indirect taxes, including:

  • an increase in VAT of 2%, to 12% (reduced rate) and 23% (standard rate) from October 2012;
  • the reintroduction of a tax on houses;
  • an increase in excise rates for fuel.

Measures have also been introduced to combat tax evasion.

Employment fund

A fund will be set up to create employment initiatives for groups hardest hit by the economic crisis, such as women and the young. A total of €200 million will be available for 2012, €300 million for 2013/2014 and €240 million for 2015.

Reactions

The main unions, the General Confederation of Italian Workers (CGIL), Italian Confederation of Workers’ Trade Unions (CISL) and Union of Italian Workers (UIL), fought the changes and organised strikes in both the public and private sector on 12 and 19 December 2011. The three trade union organisations believe the changes will have significant social repercussions because they change age limits for pensions in one go, and the increasing level of indirect taxation will have a direct effect on families and those on lower incomes.

The Adusbef and Federconsumatori consumer rights associations have said that the new measures will increase annual costs for families by €1,129, with consumption dropping by 7.6% per year.

The three unions continued their protests through industrial action, focused on thousands of workers who, nearing what was then the statutory retirement age, had signed early retirement agreements with their companies only to find themselves without a job and with the retirement age limit having been increased by a number of years.Following discussions with the unions, the government has guaranteed retirement under previous conditions for 65,000 of these workers during 2012–2013. The unions, however, say that 300,000 workers need this protection.

The principal Italian employer association, the Confindustria, is in favour of the radical changes, saying that, although they involve major sacrifices, they will hopefully lead to economic growth.

Sofia Sanz, Università degli Studi di Milano

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