Italy: Doomed to Work?


The phrase comes from Morgan Stanley's Vicenzo Gizzo, not from me. Here he gives the first part of an extremely informative breakdown and analysis of the Italian pensions reform.

On October 3, the Italian government passed a draft for the reform of the pension system. This document will now be submitted to Parliament and amend a previous proposal that had been sitting in the Senate for months. We believe this is the most serious structural reform effort in several years. The unions have called a half-day general strike for October 24, but the chances of the reform succeeding are high, in our view...........

The new reform implies a two-stage process. In the first stage, from 2004 until 2007, the employees who intend to stay at work for longer, beyond the age of 57, will obtain a 32.7% tax-free bonus, equivalent to the standard social contribution rate currently paid by employers and employees. The beneficiaries will have the option of cashing in the bonus, depositing it in their social security accounts, or channelling it into private schemes. In a second stage, from 2008 onwards, the number of years that will give access to seniority pensions will be raised from 35 to 40. Up to the year 2015, pensions for those employees who still want to retire after 35 years of contribution will be heavily penalized.

This is not the first attempt to reform Italy’s generous pension system. It is probably worth reminding our readers that up until the early nineties Italian civil servants could retire with 20 years of contributions and receive a pension equivalent to the compensation of their last year at work. Two major restructuring efforts were delivered during the Nineties. In 1992, Giuliano Amato raised the legal retirement age from 60 to 65 for men and from 55 to 60 for women. That reform lengthened the reference period on which benefits were computed from five to ten years, raised the minimum number of years of contribution to 35, reduced the disparities between private and public sector employees, and replaced wage with consumer price indexation mechanisms. A second significant step was taken by Lamberto Dini in 1995. That reform linked pension benefits to a stream of work-life contributions rather than a reference compensation period.

The impact of the two reforms is clear. Data from the Department of Welfare (Nucleo di Valutazione della Spesa Previdenziale, Gli Andamenti Finanziari del Sistema Pensionistico Obbligatorio, June 2002) show that the annual growth rate of pension spending came down from 12.2% in 1990-92 to 7.3% in 1993-97, and dropped further to 3.4% in 1998-2001. Yet over the same period, pension spending rose in nominal terms from around €70 billion in 1989 to nearly €160 billion in 2001, i.e., from around 11.5% to almost 14% of GDP, at an annual average growth rate of 7.3%. Today, at 13.8%, Italy still shows one of the highest pension expenditure-to-GDP ratios among the industrial countries. The transition from defined benefits to defined contributions took place in an extremely gradual fashion. The defined-contribution system was fully effective only for the new entrants into the labour market in 1996. It was applied on a proportional basis, pro-rata, for those who had been at work for less than 18 years. In contrast, the reform kept the status quo for those who had worked for more than 18 years. It will take until the year 2035 for Italy to shift to a full defined-contribution system.

The baseline scenario assumes an increase in life expectancy of around five years from here until 2050, a slight rise in the fertility rate from the current 1.3 to just above 1.4, and net immigration inflows of around 120,000 a year. The model rests on an eight-percentage-point rise in the activity rate to 72% mainly on a higher female participation rate and a five point drop in the unemployment rate to 4.5% by the end of the reference period. This progress limits the drop in the employment rate to only 14 percentage points over the next 50 years, or 0.25% a year, despite a 28% fall in the working age population. A strong productivity growth rate of 1.7% keeps real GDP on track for an average growth rate of 1.5%. While labour force participation has gone up in the recent past at a pace of more than one-half a percentage point a year, this progress has led to a marked deceleration in productivity growth rates. The combination of higher participation rates and strong productivity, as implied by the RGS model, is an aggressive assumption, in our view, and may hide risks of an even more unpleasant spending dynamic.

Yet, even under such favorable assumptions, the pension expenditure-to-GDP ratio, after some initial stability, goes up rapidly from the current 13.8% to a peak of 16% around 2035 before easing back to 13.6% in 2050. The ratio of pension expenditure to GDP could be conveniently decomposed into the product of a ‘legal-institutional ratio’, given by the average pension to the productivity per employee; and a ‘demographic ratio’, given by the number of pensions to the number of employees. This second ratio could be further broken down into (1) a dependency ratio -- the over-65 population to the working-age population, aged 20-65; (2) an eligibility ratio -- the number of pensions to the over-65 population; and (3) the inverse of the participation rate, which we label here the employment ratio.

In the 2006-15 decade, the dynamic in pension expenditure to GDP is likely to be almost entirely driven by demographics, as the baby-boom generation kicks in. Note that benefits paid during this period are still mainly linked to average earnings, due to the long transition phase imposed by the Dini reform. In other words, expenditure goes up with the number of pensions, while the average pension fails to decelerate quickly enough to offset the boom in retirements. When we move towards the middle of the forecasting period, pension schemes become less expensive as a larger number of employees whose pension is computed on defined contribution retires. This trend extends well into the final part of the reference period when it is also coupled with end of the impact of the baby boomers.
Source: Vincenzo Guzzo, Morgan Stanley Global Economic Forum
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Auld Lang Syne


Richard Thomkins gets ready to say farewell to the Italians. My feeling is he is a little premature, but he has certainly got the message. This little meme is begining to go the rounds. His use of the Maslow pyramid isn't quite the way I would look at things, but he has a point. We are looking for more in life than primary need fulfilment, and not all our decisions are economic ones. Bottom line: he doesn't offer a solution, and neither do I.

Arrivederci baby

I am going to miss the Italians. Not that I have known many personally, but when you think what they have given the world - the Roman Empire, the Renaissance, pizza - it is a shame to think they are doomed by their low birth rate to extinction. Even allowing for immigration, the United Nations estimates the country's population will fall 22 per cent between now and 2050. You do not have to be a demographer to recognise that this is a nation spiralling into oblivion.

The Italians are not alone. All across Europe, women have stopped having enough babies to make up for the people who die. Russia's population is forecast to decline 30 per cent by 2050 and Estonia's by a catastrophic 52 per cent. Germany's is forecast to fall by a relatively modest 4 per cent, but only because the country is experiencing massive immigration. There will be plenty of German passport holders in 2050, but they will not be eating bratwurst, drinking beer and telling bad jokes.

As birth rates decline, the immediate problem for Europeans is the rising dependency burden: there are not enough young people to support the old. The looming pensions crisis has prompted calls for quick fixes such as increasing or abolishing the retirement age and encouraging higher levels of immigration. But in the longer term, what, if anything, can or should be done to stop entire peoples and cultures disappearing from the planet?

And why on earth should women produce babies any more? In advanced societies, most people have long since passed the point where life was just a struggle for subsistence. Soaring living standards have left them in a position where their material needs have been more than satisfied. Now their sights and expectations are set on something much higher than the mere fulfilment of some primeval urge to survive and reproduce. They want achievement, recognition, happiness, and to be all they can be.

Yes: for those familiar with the work of behavioural psychologist Abraham Maslow, we are back on the slopes of Maslow's pyramid, more formally known as his hierarchy of needs. According to Maslow, the highest level of human motivation is self- actualisation or self-fulfilment. But before it can be achieved, the lower levels of need have to be satisfied: the need for basic comforts such as food, warmth and shelter, the need for safety and security, the need for love and belonging and the need for respect and self-esteem.

In less developed societies, children satisfy security needs (level two of Maslow's pyramid) and are clearly essential. But it is less obvious where, if at all, they belong on the pyramid for those of us in the developed world. One hopes they will provide their parents with love, self-esteem and a sense of fulfilment, but they are certainly not the only possible sources of such feelings. Love, for example, can come from one's partner or friends, self-esteem from one's occupation and self-fulfilment from the freedom to pursue one's dreams.

In short, parenthood is a lifestyle choice rather than a necessity, and possibly not a particularly rational one. The higher levels of Maslow's pyramid, after all, are achieved not by indulging in the staggering levels of self-sacrifice that motherhood involves, but by satisfying one's inner needs for esteem, fulfilment and freedom. This is an agenda for selfish individualism, not for devoting the best years of your life to the raising and nurturing of others.
Source: Financial Times
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Italian Pensions Battle Looming

With Berlusconi facing internal strife over pension reform, I have been busy posting over at Fistful of Euros:

Italy's top three unions on Tuesday called a general strike to protest pension reforms, dealing a blow to Prime Minister Silvio Berlusconi after he made a TV plea for support in changing the bankrupt system. The unions, which have more than 11 million members, declared a four-hour work stoppage for October 24, the third general strike since Berlusconi came to power in May 2001. The media magnate-turned-politician was beamed into Italian homes on Monday night and in almost fatherly tones warned that pension reform was "necessary, fair and wise" if the country's economic and social fabric were to survive.

But the unions gave him short shrift, saying it was not true that Italy's pensions system needed overhauling. "We ask all workers, young people and pensioners to take to the streets and defend a system which is not in trouble," the leaders of the CGIL, CISL and UIL unions said in a statement. "There is no pensions emergency. The government...is dramatizing the pensions problem. It doesn't correspond to reality," they added. The prospect of a united union front will alarm Berlusconi as he struggles to banish the ghosts of 1994, when his first government collapsed over the same pensions issue as millions downed tools in protest. Appearing to pre-empt the union response, he said on Monday that those denying that the system needed altering were "not only doing their country a disservice but were also deceiving themselves."
Source: Reuters
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Italy's Low Growth Problem Turns Negative


The Italian economy contracted in the first three months of this year. The ISAE predicts growth will return this quarter, I'm not so sure. I think the problem is endemic, and associated with the particular trajectory of the ageing process in Italy. With France and Germany now both struggling to avaoid deflation, it's getting hard to see how Italy's inflation rate can stay in positive territory for long.

The Italian economy shrank in the first three months of this year, according to official figures. It suffered because of a slump in investment, and a sharp fall in exports as the euro rose in value. The national statistics office, Istat, said the economy contracted by 0.1% from the last three months of 2002 - the first quarterly fall since 2001. Istat was confirming preliminary figures released in May. It said investment fell 5% from the previous quarter, while exports were down 3.5%. Imports also dropped, but their value was almost equivalent to exports. In the previous quarter exports exceeded imports by 2bn euros (£1.4bn; $2.3bn) and Italy's economy grew by 0.4%. The government-funded economic institute, ISAE, has predicted that growth will return in the three months to the end of June. And the government is forecasting growth this year of about 1%. Over the past ten years, Italy has had one of the lowest annual growth rates in the European Union. The euro zone economy as a whole stagnated in the first quarter. Only growth in France and Spain offset contractions in Germany and Italy to keep euro zone growth flat.
Source: BBC News
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