ITALY – Italy’s pension system will need reforming beyond encouraging the growth of a private funded pillar if it is to tackle the financial burden, says an in-depth report by the Organisation for Economic Cooperation and Development.

The OECD accepts that the pensions reforms of the 1990s were significant but says the level of public spending on pensions is still one of the highest among OECD countries.

“Although the contribution rates financing the pay-as-you-go system are quite high and significantly impact on the tax wedge on labour, they are too low to finance current benefits. Topping-up from the central budget is and will be needed,” says a new OECD report.

The Italian government has presented an enabling bill on pension reform, mainly aiming at encouraging the growth of the private pillar through the transfer of the firms’ leaving payment funds (trattamento di fine rapporto) to the pension funds.

Latest figures from Italian pension fund supervisory authority, COVIP, show a rise of 6.8% in the number of subscribers to Italian supplementary pension funds in 2002 from 2001, but more reforms are needed, the OECD says.

In particular, a main priority of the pension reform should be to further increase the employment of older workers. There are currently incentives built into the system which encourage early retirement, and although there are reforms to penalise early retirement, they will not become fully effective for many years to come.

Increasing the employment of older workers could strengthen the affordability of the pension system for the near future, and increase the coverage of future pension entitlements at an individual level. The report suggests several options for reform to tackle this issue:

Allowing all workers to shift to a defined-contribution system – the 1995 reform excluded workers with at least 18 years seniority from doing so

Gradually increasing the minimum age for pension eligibility

Introducing annual automatic revisions of the benefit formula to ensure actuarial neutrality.

The Italian government is currently in talks with the unions regarding further pension reforms, although some unions have made clear that they are against an increase in working life. Reform proposals are hoped as being announced before the country’s budget in September.