Italy's pensions reform: No more tinkering
Only four years since the last pensions reform, the Italian government is once again discussing further changes to the system.
Aside from the fact that frequent changes are detrimental to pension systems, as they create uncertainty in people, the measures being discussed are bizarre. Lawmakers are trying to address the limitations of the current system, which is financially sustainable but inadequate.
From 2018, people will be forced to stay in work until age 66, only to get a meagre payout when they retire. The main proposal floated by the government is to let people borrow money to finance early retirement. There is no other concrete plan to ease access to the second pillar.
Today, the only real choice for workers is whether to channel their entire severance pay package into their pension pot or leave it on their employers’ books and get it as a lump sum at termination of employment. Severance pay, which employers are required to set aside, was used as the main lever for developing the second-pillar system. And employers, of course, prefer to keep the money on their books (it is a cheap financing method for them).
Without taking into account severance pay packages, employer contributions are low. Asking workers to top that up with their own additional contributions is too much; real incomes are growing slowly. That said, mutual funds have grown, so many (but not the majority) have spare income and a propensity to save.
COVIP, the pension regulator, proposes to make it obligatory for everyone to deposit part of the severance pay package in pension funds. This is a second-best solution. Italians need to be incentivised to save into cost-efficient, competitive pension funds, rather than inefficient, third-pillar schemes. The biggest policy impact would be obtained by improving the unfavourable and confusing tax treatment of second-pillar pensions.
In the present regime, contributions up to just €5.164,57 a year are tax-deductible, while returns and benefits are taxed (exempt-taxed-taxed, or EET model). That threshold needs to be raised and returns should be tax free for pension fund savers.
Cutting taxes has proved particularly tough for Italian governments. The current one has tried to do that in certain areas. The truth is, there are plenty of choices in terms of fiscal redistribution, but too many conflicting interests. But if the country wants to avoid more serious problems in the future, someone needs to take the first step.