Financial literacy can help reduce the electoral cost of pension reform, according to research carried out by economics professor and former Italian labour minister Elsa Fornero and a fellow academic.
Fornero, who is professor of economics at University of Turin, was the labour minister in Mario Monti’s technocratic government from 2011 to 2013. She introduced a pension reform that helped save Italy from financial collapse, although it was seen by many as amounting to austerity.
Speaking at the IPE 360 conference at the London Stock Exchange yesterday, Fornero said public pension systems were full of political risk, as it was easy for politicians to make big promises given that they have a short-term horizon but pensions are long-term.
Today that short-term horizon favoured the older generation, she said.
A good pension reform was one that triggered changes in behaviour to ensure that it lived on in society, according to Fornero.
One of the reasons that reform was so difficult was because it had to involve reducing benefits for some and giving or reducing the burden on other generations, she said.
“Don’t believe when they tell you that they’re doing a pension reform where nobody has to pay a price,” she told delegates. “It’s simply something that does not exist in nature.”
Fornero said it was important to narrow the gap between the technical and the popular view of pension reforms. She did not like the view expressed by Jean-Claude Juncker, who once said: “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
She and a fellow academic at the University of Turin, Anna Lo Prete, carried out research to test whether this view was empirically justified, and whether the political cost was reduced when people better understand the reform.
She said the research, which analysed 20 years of pension reform in different countries, showed that implementing change reduced the chances of a government being re-elected, but that in countries with higher “economic financial” literacy, governments were penalised much less.
“This is good news,” said Fornero. “We need to work on financial literacy programmes exactly because we need to involve people in social change.”
Harking back to the situation in Italy around the time of the pension and labour market reform she introduced, Fornero said the political parties approved the reform but then attacked them in a bid to rebuild their reputation.
“It was of course natural for them to say our work was so bad, which is exactly the opposite of the message that should have been given,” she said.
The message should have been that the reform was done for the benefit of the country, and not for any single party, trade union, or interested parties, she said.
“It’s difficult but it was worthwhile,” she said. “And the reform is still there.”