Italy: Two steps forward, one step back
The new government has rowed back on pension reforms introduced by the Monti government, writes Maria Teresa Cometto, and the leadership of COVIP still has to be decided
New government, new counter-reform for the pension system. That is the Italian way of dealing with retirement issues. The reforms of Elsa Fornero, welfare minister in the Monti technocratic government, which became effective from 1 January, was already in jeopardy four months later when the new Enrico Letta cabinet was sworn in on April 28.
And in the midst of this latest political phase, which is even more chaotic than usual with every party waiting and preparing for the next election, the regulator COVIP is theoretically more powerful but headless in practice.
Parliament has not even found the time to confirm Fiorella Kostoris as the new chairman of COVIP. Her appointment was made by the previous government last February. As a consequence, COVIP’s annual report on the state of pension funds in Italy, which was supposed to be published at the end of May, was sent only to the minister of welfare.
So, Italians are once again groping in the dark about the future of their pensions. The last pension reform was elaborated in the autumn by Monti’s unelected government of technocrats. “We did it in 20 days because the country was on the brink of a financial abyss,” Fornero recalled, and her name has become synonymous with the reform. Parliament approved it but the political parties immediately started campaigning against it, hoping to gain votes in the elections that took place in February.
But no party was able to score a clear victory. The new Five Star Movement – founded by comedian-turned-politician Beppe Grillo – won a surprising 25.5%, Silvio Berlusconi’s PdL (The People of Freedom) scored a renaissance with 29.1%, and Pier Luigi Bersani’s Democratic Party disappointed his supporters with only 29.5% of the popular vote. But the most disappointing result was for Monti’s coalition, which got only 10.5% of vote, largely due to his austerity measures, including the pension reform.
The new Letta cabinet was strongly supported by the Italian president Giorgio Napolitano: the prime minister was the deputy secretary of the Democratic Party, and former leader of the Christian Democracy party. His cabinet is the result of a compromise with PdL, and includes members of Berlusconi’s party, as well as ministers from Monti’s coalition and three independents.
Among the latter, there are the two key ministers dealing with pensions – Fabrizio Saccomanni, in charge of economy and finance, and Enrico Giovannini, in charge of labour and social policy. Saccomanni worked at the Banca d’Italia, the Italian central bank, for most of his career, and Giovannini was the president of the Italian statistical institute, ISTAT.
As soon as he took over in May, Letta announced that he wanted to soften Fornero’s reform by introducing some “flexibility” into the rules concerning retirement age, resolving once and for all the ‘esodati’ problem, and launching the idea of generational handover contracts under this scheme. Workers near retirement would work half the time for half their pay, while the rest of their job would be done by younger workers. The only problem is where to find the money to pay for these changes.
However, handover contracts could cost up to €1bn a year if, as the government hopes, up to 500,000 young people find permanent jobs over the next five years, because older workers are promised full social-security contributions. Employers would pay half their salary and half their pension contributions, and the rest of the contributions would have to be paid by taxpayers.
Interestingly enough, the candidate to lead COVIP, Fiorella Kostoris, an expert on public finance has criticised the idea. “Working less so that more can work is not going to get us anywhere; to make more people work we all have to work more.”
The esodati problem was created by the abrupt transition to the new retirement age established by Fornero’s reform. The esodati are workers who have agreed for their employment to be terminated, usually with financial incentives, thinking they could also take early retirement.
Instead they were caught in a limbo – most of them are under or around 60 but the new
retirement age is 66 years for men and 62 for women, so they are not eligible to retire and cannot get a new job, and do not have either a pension or a salary. In a recent interview with Class CNBC, Fornero said that the Monti cabinet solved the problem for 130,000 esodati, but more need help.
Giovannini has described the esodati problem as an “emergency” that needs to be faced. Flexibility in the system could help, allowing workers to retire earlier but with penalties in terms of lower social-security benefits. Several proposals are being considered. One proposal, which is thought to have the best chance of success, comes from the PD party’s Cesare Damiano and Pier Paolo Baretta. The former used to work for CGIL, the left-wing trade union, and now is the PD chairman of the parliamentary committee on labour; the latter used to work for FIM, a Catholic trade union, and now is the deputy minister of economy and finance under Saccomanni.
Their idea is to allow 62-65 year old workers to retire with penalties of up to 8% of their pension, and incentivise those aged up to 67-70 to work longer and get up to 8% higher pensions. “Actually this means reinstating the so-called ‘pensione d’anzianità’ that was cancelled by Fornero and used to allow younger workers to retire if they had sufficient contributions,” says Giuliano Cazzola, a pension expert and former union leader with CGIL, who later converted to PDL. “The big question is where the government can find the financial means to keep the system sustainable.”
In the mean time, pension funds are growing very slowly, with annual inflows of just €3.1bn, according to the latest data published by Banca d’Italia. Their assets (around €100bn according to MEFOP) are invested very prudently – 50% in Italian government bonds, 10% in corporate bonds, 15% in equities, 25% in liquidity instruments. Three new closed funds for public sector’s employees have just started – Espero for teachers, Perseo for local administrations, and Sirio for state departments. They have huge potential but have not yet been promoted as much as they could be.
COVIP, which has enhanced power to control funds’ risk because of a Monti-government provision, is currently managed by just one commissioner, after the expiry of the other commissioners’ terms.
Kostoris, tipped to lead the supervisor, is the widow of Tommaso Padoa-Schioppa, a famous economist who worked at Banca d’Italia and at the ECB, and who was also minister of economy and finance under Romano Prodi.
Kostoris once called for Italy to abolish a week’s worth of holiday to increase productivity. And who knows whether her strong no-nonsense stance will gain approval among the parliamentarians who still have to approve her appointment at COVIP, and who are already warming up to the next demagogic electoral campaign. This may start in just few months, as soon as the parties agree on new voting rules.