Since 1995, Italy’s pension system has undergone “reform” six times. The retirement age has been moved down or up, swinging between political expediency and economic necessity, depending on whether the government needed to curry favor with voters or to rein in public spending. Now, as Prime Minister Matteo Renzi girds himself for a referendum fight later this year, it’s his turn to resort to pension reforms for his own boost in voter support.
As far back as the 1970s, the Italian government used pension-system changes to try to appease voters. A 1973 law allowed married women with children to retire after 14½ years of work. These were aptly known as “baby pensions.”
Such blatant privileges have been corrected over time, beginning with the reforms pursued in 1995 by then-Prime Minister Lamberto Dini. In 2004, Silvio Berlusconi raised the retirement age to 60 from 57, to take effect beginning in 2008. But in 2007, Romano Prodi delayed the raise until 2011, bringing the retirement age back down temporarily to 57.
In 2011, in the midst of financial turmoil, then-Welfare Minister Elsa Fornero finally secured a substantial raise in the retirement age, lifting it to 66 years for men and initially 62 years for women, to be raised incrementally until the two converged by 2018 at the new universal retirement age of 66 years and 7 months. At the same time, Italy adopted a contribution-based system that valued pensions by the actual social-security payments made by workers, as opposed to being determined as a percentage of their most recent salaries.
According to the National Institute for Social Security, this would have meant a savings of €80 billion ($90 billion) from 2012 to 2021. The European Commission’s 2015 Fiscal Sustainability Report also noted that this arrangement resolved any long-term threat posed by pensions to the sustainability of Italy’s enormous public debt, currently at 133% of gross domestic product.
But the sustainability of any pay-as-you-go pension system rests on the ratio of retirees to the working-age population. According to the European Commission’s 2015 Ageing Report, last year in Italy this was 33%. By 2025, this ratio is expected to reach 37%, when 23.5% of Italy’s population will be over the age of 65. The data become even more worrisome as time goes on: By 2050, the old-age dependency ratio will be 53%, when 30% of the Italian population will be over 65.
Now Mr. Renzi is proposing that workers be allowed to retire three years earlier. The earlier benefits would at first be distributed as a loan, to be issued by a bank or insurance company. After three years the beneficiaries would then begin repaying these loans through deductions of between 1% and 15% taken out of their pension checks over the course of 20 years. From the retiree’s point of view, this would in effect divide the same pension over an additional three years, resulting in lower monthly average payments.
This allows Mr. Renzi to stress that his proposal is a “private-sector solution.” Public funds would only be affected insofar as there would need to be a tax deduction to offset the lower pension benefits, or in the event that a pensioner should die before having fully repaid the loan to the bank, in which case Rome would guarantee the remaining interest payments, estimated to be between €600 million and €700 million a year.
The proposal still needs a law to achieve implementation and public funds to ensure its solvency. That makes Mr. Renzi’s private-sector claim questionable.
More than the policy, it’s the principle that’s worrying. The dynamics of the Italian government’s meddling with pension reform is typically this: first a show of largesse, followed by a crackdown. Pension spending in Italy last year was 15.8% of GDP, versus an average of 7.9% among members of the Organization for Economic Cooperation and Development. That only makes these political swings all the more harmful. Either the workers won’t take the deal, or, if they do, public spending will rise. This will open the door to all sorts of future adjustments, from governments stepping in to finance part of the loans to broadening the extent of tax deductions.
But Mr. Renzi is facing an important referendum in the fall. He has proposed a constitutional reform that would strengthen the power of the executive and transform the Senate. The plan has gained many opponents along the way from both the far left and the far right, who sense an opportunity to strike a blow against the flamboyant prime minister.
With his pension proposal, Mr. Renzi is playing it safe politically, but not economically. In 2000, 46.5% of public spending was devoted to the elderly. In 2013, it was 50%. With an aging population, the burdens on the public purse will only increase.
The Italian pension system is far from perfect, but it has finally reached an equilibrium of sorts. If history teaches us anything, it’s that apparently harmless attempts to lower the retirement age may be the first step on a dangerous slope. Mr. Renzi should instead focus on building consensus around reforms that revive economic growth, from deregulation to tax reform. His government, for instance, has still not followed through with a liberalization law first conceived in 2015. Bribing Italian voters into buying his constitutional reform could be a strategy as dangerous as is shortsighted.
Mr. Belardinelli is a research fellow at Istituto Bruno Leoni, where Mr. Mingardi is the director general.
Da Wall Street Journal Europe, 16 giugno 2016
