As sovereign debt levels rise, and the cost of borrowing increases, Maria Teresa Cometto reports on the effects of the pension sector on Italian public finances and the political willingness to make the necessary changes

The Italian pension system is (almost) perfect: it is “the most stable one in Europe”, according to the Treasury minister Giulio Tremonti. It does not need any structural change.

That is what he said in May 2010, before the European financial and economic crisis forced Silvio Berlusconi’s administration to cut some public spending, including retirement benefits. Actually, the measures proposed by Berlusconi - which are still in need of the Parliament’s approval at the time of writing - will affect the pension system little: they only introduce a few adjustments to the current rules. This may explain why the left-of-centre opposition Democratic Party (PD) has not declared a ‘war’ against the changes, while re-affirming its general disapproval of Berlusconi’s economic policy. The only issue that could spark a specific battle is the Italian administration’s reply to the European Commission that has asked again to abolish differences between women’s and men’s retirement ages in the public sector.

Last year a compromise was reached between two extreme opposite positions within the Berlusconi’s cabinet: one held by the minister in charge of public employees, Renato Brunetta, who wanted to unify the retirement age for men and women at 65 years immediately; and the other by the welfare minister Maurizio Sacconi, who wanted to address the discrimination faced by women in the workplace, before touching pension benefits. The result was to gradually increase the retirement age for women from 60 years, the current norm, to 65 by 2018. But now the European authorities have asked Italy to change the rules by 2012.

Sacconi wanted to convince them that it was not possible, because the administration risks losing the support of the two centrist trade union organisations CISL and UIL. The leader of the former, Raffaele Bonanni, has warned that public employees have already accepted many sacrifices such as freezing salaries and that re-opening the discussion about women’s retirement age may “create a climate of rage that does not benefit anyone”.

Once again, Brunetta had a different perspective: because of the EU, he thought that the Italian Parliament could accelerate the equalisation of the retirement age for men and women in the public sector. “Our international credibility would be reinforced and we can use most of the savings for welfare measures in favour of families”, Brunetta said.

Confindustria chairwoman Emma Marcegaglia went even further, asking for an increase in women’s retirement age in the private sector, where it is also 60 years. “In a country where, thank God, life expectancies are among the highest in Europe, this issue must be addressed,” she said.

But Sacconi promptly raised a barrier to this discussion, replying that the change is possible “only in the public sector, where jobs are safe”, as public employees cannot be fired in Italy. The change will happen indeed in 2012, because after talking with the EU at the beginning of June, Sacconi admitted that there was no room to negotiate.

After promising that the administration would not touch pensions again this year, Tremonti announced some light cuts in pension benefits that will save €360m in 2011, €2.6bn in 2012, and €3.5bn in 2013. The trick is postponing the payment of the first pension cheque: 12 months after an employee reaches his/her requirements in terms of age and contributions; 18 months in the case of a self-employed. Besides, the minister pledged a crackdown on disability support benefits, which today are paid to 2.7m Italians at the cost of €17bn. In other words, he implied that some of those ‘disabled people’ were cheating.

Will these minimal measures be enough to keep Italian public finances in order, thus avoiding a Greece-style crisis? Tremonti thinks so, because one year ago Berlusconi’s administration decided that, from 2015 on, the retirement age will be gradually and automatically increased for everybody according to life expectancy, reaching 67 years for men and 62 for women in 2020.

In the meantime, it has changed the parameters to calculate benefits based on contributions and age and this should translate into extra savings
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Last year’s changes in the pension system were approved quite smoothly, because everybody, including the political opposition, understood that it needed to be done. Now, Berlusconi looks like he doesn’t want to lose this kind of social consensus. Both right and the left-wing parties are avoiding any discussion about two problems: the growing cost of public pensions as a share of GDP, even though it decreases in absolute terms; and the growing number of young people who are likely to have insufficient means to retire when it’s their turn.

The latest report from the Italian budget office tried to caculate the impact of the recent economic crisis. Previously, it thought that the cost of public pensions would reach its peak - 16% of GDP - in 2035, and then fall to under 14% in 2045 stabilising at that level, the same as in the 1990s. But because GDP shrank last year, the peak has already almost arrived and the new equilibrium around 14% will not be possible before 2060, jeopardising the system’s solvency. Unless, of course, Italy experiences a new economic boom. This is unlikely to happen, according to Berlusconi’s critics. Tremonti’s budget cuts do not have any hint of the structural reforms that Italy needs to re-launch its economy, according to the PD leader Pier Luigi Bersani; on the contrary they may induce a depression, argues Susanna Camusso, the emerging new leader of CGIL.

“The other problem is the youngsters: either they are unemployed or they work with short-term contracts and with gaps between jobs, so they are not making enough contributions to the public pension system,” explains Giuliano Cazzola, the vice-chairman of the House of Representatives’ labour committee and chairman of the welfare committee of the ruling People of Freedom (PdL) party, and a former head of the CGIL and of the pension authority (COVIP) board. Together with Tiziano Treu - a former leader of CISL and former welfare minister for the Democratic Party (PD) in Prodi’s first cabinet (1996-97) - Cazzola has proposed a bipartisan reform of the pension system, that would guarantee a base level of social security for new workers and several changes in the way contributions are calculated. “The goal is to get a final pension that represents at least 60% of the last salary”, says Cazzola. This proposal fell on deaf ears.

INPS, the Italian social security administration, is trying to ring the alarm bells about the inadequacy of contributions to the public system by young people. Its chairman, Antonio Mastrapasqua, is sending - for the first time - a statement to about 20m workers about the contributions they have accumulated and how much they will translate in terms of pension payments. The idea is that they should realise the state of their situation and make informed decisions, such as contributing to a pension fund.

But the latter is another sore spot in the Italian economic landscape. ‘Closed’ pension funds - the ones that are sponsored by the unions - never took off, except the two oldest and better established: Fonchim and Cometa. Only PIPs (individual retirement accounts wrapped like insurance products) are still gaining new members and contributions, thanks to their distribution network made of the banks and insurance companies that manage them.