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Wednesday, June 04, 2003

Italian Pensions: Crisis Pending

OK this is a full frontal hit. This guy is saying everything I have been suggesting about the Italian situation and the pensions problems. He is rightly concerned about the democratic implications of 'forcing' the pensions devaluation, but it's hard to see populations with a heavy weighting to older voters, voting for a slashing of their 'virtual' savings. Still apparently they like the thought of having immigrants even less. Henry is away in Stockholm for a conference on codecision and democratic legitimacy, I hope they'll be looking at this problem. For y money much of the discussion about the new EU charter proposals have an air of complete unreality and farce about them in the light of this underlying reality. If we don't find a coherent way of handling this, some important democatic details could seriously be in question. Well, I suppose it is an advance that we're now no-longer going to be called 'Christendom'.

Italy's pension system absorbs the largest share of gross domestic product among industrialised countries and is bound to absorb more over the next 25 years. The total cost of public pensions is equivalent to a tax on labour of 45 per cent, crowding out private pensions and preventing the financing of a decent welfare system. Italy is the European Union country spending least on unemployment insurance and social assistance despite its relatively high jobless rate. Contributions already fall short of payments: the system is running an annual deficit of 3 per cent of gross domestic product.

Silvio Berlusconi's government knows a crisis is pending. Yet despite holding 57 per cent of the seats in parliament, more than any non-emergency coalition in the last 50 years, it does nothing. A draft pension bill, which would not improve the sustainability of public pensions - indeed it would reduce contributions for new employees while maintaining their pensions at the same level - has been stuck in parliament for 18 months.So, predictably, Italian politicians are turning to Europe. With Italy set to take over the EU presidency next month, calls for an agreement on pensions are growing louder. Mr Berlusconi himself has repeatedly advocated a "Maastricht for pensions".

This is a bad idea. There are no sound economic arguments for putting EU supranational authorities in charge of pensions. Public pension systems in Europe are vastly different. A harmonised approach could end up adopting the worst of the various systems. It is much better to allow national policies to compete, encouraging reforms that imitate the best practices.

Public insurance schemes can be better run when decentralised. There can even be disadvantages in scale: the most effective social security systems in Europe are those of the smallest EU member states. Last, previous EU summits have set broad targets for pension reforms such as increasing employment rates for older workers and raising effective retirement ages. They were meaningless for some countries and totally unrealistic for others - and were never taken seriously. The only reason to involve the EU is to shift responsibility on to someone else, far away from domestic pressures.

Italians are well aware that the reforms carried out by the Amato, Dini and Prodi governments in the 1990s must be completed. A recent survey* indicated that two out of three Italians believe that a pensions crisis in the next 10-15 years is likely and consider the reforms of the past decade simply "a first step towards stabilisation". Yet no reform to increase the sustainability of the pension system would enjoy majority support, according to the survey. Workers close to retirement age are not prone to accept compensating transfers to the young generations. On top of this, unions are fiercely opposing further reforms, just as they do in Germany, France and Spain, facing similar problems of long-term sustainability of public pensions.

Why does Mr Berlusconi feel that Italians would be more receptive to pensions changes forged in Brussels? To foist such a sensitive issue on to the EU could prove fatal for fragile supranational institutions lacking accountability. And it could encourage trade unions into co-ordinating Europe-wide resistance to any structural change pension provision.Involving the EU authorities is no remedy for the short-sightedness and inter-generational selfishness of voters. National governments ought to have longer horizons, Italy's included. And younger generations should find stronger representation for their interests in the political process. There is no reason to believe that the decision-making institutions of the EU are any more far-sighted or resistant to the demands of older votes than national governments.

The only way the EU can help alleviate the pensions problem is to change the way it implements its fiscal rules, shifting the focus of the stability pact from year-by-year budget balances to longer-term public debt reductions. This would help pension reforms that allow workers to opt out from public schemes, since these deliver reductions in long-term liabilities but cut revenues in the short-term. But Mr Berlusconi should be warned: implementing the pact on a longer-term basis - and focusing on public debt reduction - would only make things more difficult for Italy.
Source: Financial Times

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