The plan by Italy’s prime minister Matteo Renzi to give employee severance pay – Trattamento di Fine Rapporto (TFR) – directly to workers each month from next year, rather than having it kept until the end of the employment, has met with warnings from pensions sector consultants.
Employers’ organisation Confindustria has already expressed its opposition to the move, which potentially removes an important source of self-financing for smaller companies in Italy.
Meanwhile, consultants and academics warn that giving the TFR in cash to Italian workers would effectively deprive them of a key part of their pension provision and fail to achieve the fillip in consumption the premier is hoping for.
Renzi said on Monday: “From next year, I would like the TFR money to go straight into the monthly pay packet.”
In an electronic newsletter to the public, he said the money belonged to the workers, and that the philosophy of putting this money aside – to prevent people from “burning” it all at once – seemed too protective and the action of a “nanny state”.
“[The TFR proposal] could translate itself into a doubling of the €80 operation, giving more possibilities to buy,” Renzi said, referring to an earlier move to give workers in Italy an €80 monthly tax credit.
But Giorgio Squinzi, president of the employers’ association Confindustria, told small businesses this week: “This idea about the TFR, which could wipe out with a single stroke of the pen €10bn-12bn from small Italian companies. If this is the road they intend to follow, we give our reply, very simply: No.”
As the pensions sector awaits the final form of the proposal, with discussions taking place on this and other issues between trade unions, industry and government, experts warned about the possible consequences.
Claudio Pinna, managing director at consultancy Aon Hewitt in Rome, said if employees were given the option of receiving their TFR money immediately, many would choose to receive it now rather than later because of the weak economic situation.
“But this is very dangerous because the TFR is really the main source of financing of post-employment income, and if you use this, you will have really serious pension issues in the future,” he said, with the caveat that the shape and details of this proposal were still unknown.
On top of this, Renzi should also consider that it is uncertain whether workers will in fact use the money to purchase goods and services, Pinna said, due to the economic situation.
“When people are not comfortable, they do not spend,” he said.
Pinna also pointed out that, for companies with less than 50 staff, which have decided not to direct the TFR to pension funds or to the state social security institution INPS, the TFR money they held was an important source of self-financing.
“This cash is very important for these little companies, especially at the moment, when they have problems with the banks,” he said.
Stefano Gatti, professor of economics and finance at Milan’s Bocconi University, said the plan would weaken pension provision for Italian workers, and argued that the real motivation behind the proposal was to boost consumption and revive aggregate demand.
“Are you really sure about incentivising consumption but leaving people with no savings after retirement?” he asked. “This is really the question.”
Andrea Canavesio, partner at MangustaRisk, said though Renzi seemed to be pushing the idea hard, there were still many unknowns.
“For a politician who is looking to get elected soon-ish, there is nothing better than putting money in the electorate’s pockets,” he said.
He said there could be a taxation on the TFR when added directly to pay packets, which would increase overall tax entries.
Gatti pointed out that payroll income is taxed at the marginal personal tax rate, while the TFR, as things stand now, is taxed at a reduced rate.
Canavesio also said the move, if it were to happen, might have a big negative effect on second-pillar pension funds if it were also to apply to those people who were automatically enrolled in those funds, and also to the people who had decided to enrol voluntarily.
“It would be a disaster if it included all the TFR that has already been accumulated,” he said.
Renzi is today putting an overall labour-market bill before the Italian Parliament designed to increase workforce flexibility and employment.
The proposal on the TFR is not part of this raft of legislation but will form part of the Budget law that is set to be approved in the middle of October, Pinna said.