Pension reform fails to meet future challenges

Prime Minister Romano Prodi announced on friday morning that his center-left government has found an agreement with labor union representatives on the principles of a new pension reform. The new compromise replaces a reform proposal by the former center-right coalition (Riforma Maroni) which was meant to raise the minimum age for retirement. Some of the details of the new reform still need to be clarified, but the basic outlines of the deal have already been criticised by many observers, including the EU Commission.

The government has for a long time been divided on how to modernize the present pension system. The two communist parties which are part of the ruling coalition have vehemently demanded the abolition of  the so-called “Scalone” of the center-right reform proposal which foresaw an increase in the minimum age of  retirement from 57 to 60 years from January 2008. At the same time, the more moderate exponents of the government are aware of the fact that Italians retire very early by European standards and that this imposes enormous financial burdens in the long-term. The compromise that has now emerged is a partial victory for the radical left as the “Scalone” has been abolished so that the retirement age will be raised to only 58 years in 2008. From 2009 onwards, a new complex system will be imposed which calculates the retirement age as the total sum of a person’s age and the number of years in which he has paid into the pension scheme. This system will involve a general increase in the minimum age of retirement but as a concession to communists and labor unions it will exempt some occupations, which will still enjoy the old rules (retirement at 57). This exempted category is not negligible; it will include at least 1,4 milion early retirees.

The compromise has been heavily criticized by the center-right opposition but it has also disappointed the more market-minded elements of the center-left coalition. Emma Bonino, European Affairs minister and member of the Radical Party, has called the proposal “hardly ambitious” and has underlined that it does not take into account the interests of future generations. There is some speculation that the Radical Party might leave the coalition over the pension compromise and thereby tear apart the government majority.

It is clear that the reform does not resolve the long-term financial challenges of the Italian pension system. The economic newspaper Il Sole 24 Ore has stressed that over the coming decades the number of people in working age will decrease because of the general demographic decline and that to compensate for this decrease of the working population it is absolutely indispensable to raise the retirement age. The fact that the current government is not addressing this long-term problem has provoked an immediate response from Brussels. The European Commission has declared that it will produce an assessment of the reform when all the details are known. But a spokesperson for the Internal Market Commissioner has already made clear that the retirement age in Italy remains too low and that by embarking on this reform, the Italian government does not follow the line of other European countries who have taken steps to address the long-term demographic decline and to provide for the affordability of future pensions.