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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Italy related comment. He also maintains a collection of constantly updated Italy economy charts together with short text updates on a Storify dedicated page Italy - Lost in Stagnation?

Friday, October 20, 2006

Agreement On Severance Pay And Small Companies

Following the questioning of the 2007 budget proposal (and here) over severance pay and pension funds, the draft 2007 budget has now been amended so that businesses with fewer than 50 employees need not transfer severance pay to the state pension fund.

This debate seems to have two components: the one inside Italy itself - which relates to the financial burden on small companies which was posed by the original proposal - and the one being held at the EU commission and the ECB about how to treat this budget item. Really I think there is little doubt on the latter. As Moritz Kraemer, head of European sovereign ratings at S&P, says in the extract posted below "We would not consider this to be revenue". Nor do I think would anyone else. So the agreement resolves the first question, but not the second one, which is still how to bring the 2007 budget within the current guidlines of the EU Stability and Growth Pact.

Companies with more than 50 employees will have to transfer 100 percent of the severance pay to the state, according to an agreement reached late yesterday between the government, unions and businesses. The severance payments will bring in about 5 billion euros ($6.3 billion) to the pension fund.

The agreement caps almost seven years of debate over the so-called Tfr pay. Businesses often use severance pay they are required to withhold for employees as an inexpensive form of financing.

Standard & Poor's and Fitch Ratings both cut Italy's credit rating yesterday on concern Prodi's plan to reduce the government's debt and deficit doesn't go far enough. Moritz Kraemer, head of European sovereign ratings at S&P, yesterday said the severance transfer was a ``liability in the future.....We would not consider this to be revenue,'' Kraemer said on a conference call.

Employees working for a small company will have until June to decide whether their severance pay should go to either a private or state-run pension fund or remain within the company, Labor Minister Cesare Damiano said. The 23,000 companies in Italy that have 50 or more employees will automatically transfer the entire amount to the state fund, according to the agreement.

``The government predicts that about 37 percent of the Tfr in 2007 will end up in funds and the rest will end up in part self-financing the companies, and in part sustaining the state pension fund for investment in infrastructure,'' Damiano told la Repubblica in an interview published today.


Hans said...

Please take note: there is no amendement on nothing, this stuff has to be voted. And this will happen shortly before, during or after Christmas. Everybody should understand that parliament is now going thru this law and will not have finished its biz for some time.
So, please, no headlines about changes, amendments etc having gone thru. They have not.
Maybe. Just maybe.
And again: companies with less than 50 employees are in excess of 90% of all comapanies.

Edward Hugh said...

"there is no amendement on nothing, this stuff has to be voted."

Ok thanks for this Hans. I am getting the picture (slowly). In my own defence I do say:

"the draft 2007 budget has now been amended"

and I guess that is the state of play, the draft has been ammended, but it is still a draft, and there is obviously still a long vote to travel. On the having to be voted part, this would presumeably be the response to Draghi and "the men in this room will not allow" argument: post comning on this.

Hans said...

This severance pay thing is of great importance to young employees.
Here is how it works and why it's important.
Every employer must set aside each year for each employee the equivalent of one monthly salary. The funds stay with the employer and get, actually, four and half percent interest. In 2007 the savings industry should ready pensionfunds to which the employees may transfer their severance pay.
It's obvious that for an employee who has say 5 years to go, it doesn't make much difference, may even add too much risk. But for young employees (like Paris, who cares so much about her pension) it should make all the difference being exposed to equity markets.
What's really strange about all this is that we now have Confindustria agreeing about severance pay and unions being totally absent and silent. It's the employees money, and to them it's of no importance how many co-employees there are. For them anly age counts.

Hans said...

being exposed for 4 0 y e a r s
to equity markets

I.Bottini said...

Hans, please note I don't give a darn about my Italian pension. I don't live there, worked there for about 1.5 years in total and am very glad I don't have to cope with the unpredictable nature of the tax system which most Italians endure.

I do know that the whole pension system has been hijacked is inequitable, unfundable and a very Italian mess.

Hans said...

"the whole pension system has been hijacked is inequitable, unfundable and a very Italian messthe whole pension system has been hijacked is inequitable, unfundable and a very Italian mess".
The facts, please; any language will do ;-)))))

I.Bottini said...

Hans, I can't be bothered to go through the statistics. Pensions were in NO WAY tied to contributions made, they were simply tied to the level of declared earnings in the last five years of a person's working life. Hence, for example, shop owners' declared income suddenly ROSE in the five years prior to going on a Pension. Does the term UNFUNDED mean anything to you? There are thousands of examples like that. If I know about them and the Italians know about them then should you. Don't play smart little games.

If you think what I say is untrue: prove me wrong.

Find me the facts that make what I say untrue.

Hans said...

your example shop owners could do so until 1995. After the Dini reform Italy has a dual pension system: pension contributions paid after 1995 will create a pension that is calculated exclusively on contributions and years of contribution.That's why the severance thing is so important, because it lays the foundation for a personal and private pension fund. For people like Paris, who do not contribute and haven't a dime left after a long and ranting life, will still be able to fall back on a social pension: actually somewhere around 500 €. Enjoy !

Edward Hugh said...

"will still be able to fall back on a social pension: actually somewhere around 500 €."

I think this is getting somewhere near the point. This is quite similar to the situation in Spain, indeed Spain may now be a little better off in this sense, since fiscal prudence means that they have a small budget surplus and Zapatero has been steadily raising the minimum pension, and widows' pensions, things like this.

But this is just why I mention the workhouse, since if these very low minima are to be slashed at some point this is effectively what we will be back to.

Let me explain a bit.

In Germany the pension reform process has hit a kind of wall: the mimina available under the general social security welfare system. Effectively it is very difficult (for natural justice type reasons) to lower the contributory pension below the ss minimum. So the only alternative is to lower the ss minimum, but this raises wider social implications, and my feeling is that no-one in Germany is yet ready to broach this. We will, of course, get there eventually.

So the problem is if ever in Italy you need to reform conributory pensions below 500 euros a month.

Again, it is not impossible that this arise, if Italy doesn't manage to raise the trend growth rate.

Essentially those who haven't contributed aren't the problem, since they have been paid for with the contributions of others. But just here comes the snag, since who is going to pay for the pensions of those who have contibuted, since their money has largely been spent on paying for those who didn't contribute.


"That's why the severance thing is so important, because it lays the foundation for a personal and private pension fund."

So the young people are going to be busy financing a 'fully funded' scheme.

So one more time: who pays for the people in the middle???

The only way to finance this is out of tax revenue, but we are about to see in Germany what happens when you hike consumer taxes by 3%. And if you put the tax on individual contributions at company level you just destroy employment.

OK, so the big question is just by how much is D'Alema prepared to slash the social pension in the longer term? 50%?

This is why, without a dramatic change in the growth path, I just don't see sustainability here. Hence my default call.

And we haven't got round to talking about health yet.

Incidentally, I am sure the huge pensions that Paris refers to are massively injust, but exactly how typical and numerically important are they? It is here I have my doubts.

I.Bottini said...

Thanks for wishing ma a penniless dotage Hans. One thing stands out though: you have a vested interest in keeping the existing system afloat and I don't. That may cloud your point of view IMVHO.

As for the unjust pensions most of what I know is based on personal knowledge. The Italians are very adroit at keeping unfortunate statistics in dusty bottom drawers so finding out just what the distribution of pensions is might be difficult. I would hazard the following guess: most of the pensions currently being paid appear to be a) generous and b) unfunded.

Edward I do think we are getting somewhere in the discussions here. And I do think that reform is necessary. What I think you are maybe missing is the culture of entitlement which is so deep seated in Italy. This will make reform difficult. Anyway, as the French say: "Bon Courage".

I.Bottini said...

Here's a link on information regarding pensions in Italy:


I.Bottini said...

Some statistics to pour over:


Hans said...

"you have a vested interest"
Paris, here's the truth: I always thought of the severance pay deposit as an embarrassment: my employees forced to finance my company!
As for my pension: might or might not be something in the order of 300 € a month, makes for a good lunch at cracco's with a not too expensive bottle of wine. I'll tell you when the first payment arrives.

I.Bottini said...

Hans, obviously you're not making large enough contributions!! Mr. Prodi is watching you. Beware.

In the meantime you are counting on that minimum pension maybe?

One thing: your assessment of the Prodi Budget please?

I love the concept of IRAP. It's so Italian, along the lines of the "Miniumum Tax" and all the other totally baroque taxation concepts: we know you have money, we can't prove it, we won't even try, but we are going to come and take some off you anyway. Because we can.

I think a little modernization of the concept of "Government" is required. Government does not equate to the power to help yourself to other people's money. Serfdom has ended, time to update.

Hans said...

Oh Paris, how very far you are from understanding the T R U E perversities of these systems. My contributions couldn't be higher because they're capped at the max pensionable income which hoovers between 60 and 80 000 € taxed income. On these € I pay something between 17 an 20 % pension contribution. I'm paying since reform every year from 12 000 to 16 000 €. After 10 to 12 years this will generate the pension I mentioned.Being you, Paris, a fast numbers lady, you will already have understood that summing pension contributions and taxes (irpef) beyond a certain income level ( I'd guess 160 000 E) do result in a decreasing overall tax burden (not to mention stock options that are taxed at 12,5%). So maybe going beyond a certain income you might want to come back to Italy.

I.Bottini said...

I'm so glad I left.

Edward Hugh said...

"I'm so glad I left."

Well quite Paris. So you are out, and Paola is out, and lord knows how many more are out. But we can't just leave it there can we? Things still need to be done. Italy needs a future, so changes have to be made.

Maybe by now you will accept that I am not only interested in Italy since it is some weird kind of economic laboratory (which it is), but also because it does matter to me what happens to people there. Maybe it isn't very fashionable to say this these days, but I do care about what happens.

So in the first place I set this blog up to try, in my individualistic and ideosynchratic way, to do something.

So lets get to it. As someone or other once said: there is lots to do.