ITALY – Reforms to incentivise savings into Italy’s second-pillar pension system are unlikely to take place in the near future, the country’s labour minister has said, citing the Treasury’s inability to fund any increases to pension tax relief.
Discussing the pension reforms implemented within weeks of Mario Monti’s government assuming power last November, Elsa Fornero argued that the changes – including an increase in retirement age and bringing forward a planned shift to notional defined contribution (NDC) in the state pension system – were necessary to appease financial markets, or there would have been “devastating” consequences.
Addressing the WorldPensionSummit in Amsterdam on the anniversary of her joining Monti’s technocrat cabinet, the academic also said that introducing a compulsory second-pillar contribution would result in too high a level of pension saving.
She instead backed the notion of allowing workers to divert some of the 33% payroll tax into a second-pillar plan.
Fornero highlighted the importance of her overseeing both labour and social policies, as there was no pension system “without a well-functioning labour market” and acknowledged the need for Italy to diversify away from an over-reliance on a single retirement pillar.
“We all know that a pension system based almost exclusively on one pillar – the pay-as-you-go – is perhaps not efficient,” she said.
“We would like to have more diversification in terms of pay-as-you-go and funded, but we cannot achieve this in the short-term because there was no way to reduce the payroll tax rate in the public pay-as-you-go system, no way of devising some kind of opting-out clause, which I would have liked to.”
Fornero noted that a clause in the law mandated for a future study on the lowering of the payroll tax, with the contributions diverted to the second pillar.
But she said that such a reform was impossible in the current environment, and without the Italian Treasury being able to offer pension tax relief.
“Indeed, pension funds in Italy suffer not from a lack of tax incentives, but low income,” she said.
“Again, the problem is macroeconomic – it’s a problem with the labour market and earnings.”
Fornero also noted that her reforms and shift to NDC had ended the element of implicit taxation within the country’s seniority pension, thus allowing people to benefit from employment beyond the 40-year cut-off point.
The previous system, an unfunded defined benefit arrangement, was based on years contributed rather than retirement age, and theoretically allowed contributors to retire in their late 50s after 40 years of work.
“What we had before, seniority pension, had a very large implicit taxation on continuing work because, when you reached the minimum age at which you were allowed to retire, if you continued working, then you lost pension wealth,” she said.
“This is just the contrary to what we need in the pension system. With the defined contribution formula, we have eliminated this.”