December 19, 2017

Why is everyone badmouthing the Fornero reform but no one is getting rid of it?

The current Pensions Act has the merit of putting a band-aid on social security expenditure. The system, however – as a result of the demographic revolution that has taken place since the 1970s – remains in itself unbalanced and disadvantageous for young people. The “youthquake” has moved away in Italy. An essay by professor Martone

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Everyone is talking about it, but nobody is doing away with it. This is the destiny of the Fornero reform of pensions.

Although unpopular with all political forces, five years after its approval, no government has been able to change the structural innovations the Fornero reform has introduced into our social security system, from raising the retirement age to abolishing old-age pensions.

The various measures that have been taken in this field, from the so-called Women’s Option, EPA or Social EPA, on one hand have been useful in mitigating the serious consequences of the drastic increase in the retirement age to 66 years and 7 months for some categories of workers, while on the other they have certainly not revolutionized the structure of the reform itself.

And the same considerations apply to the amendment, just approved in the Senate, to Budget Law 2018, with which the increase in the pensionable age to 67 years has been scrapped for heavy-duty jobs, as per the decree of the Ministry of Economy and Finance, published in the Italian Official Gazette no. 289 of 2017. As in the case of the Women’s Option and EPA, the revolutionary proclamations of the majority of political forces about the need to abolish the Fornero reform have also resulted in the adoption of measures which ultimately cause very limited exemptions from the framework of the reform itself.

The old rule for adjusting the retirement age and the new election campaign

But first things first. The decree in question, which raised to 67 years the retirement age previously set by the Fornero reform to 66 years and 7 months, was introduced to implement the principle of automatic adjustment of the retirement age to life expectancy. This is a fundamental principle that ensures the preservation of a pension system, as it directly correlates social security benefits with life expectancy, and it had been introduced into our system several years before the approval of the Fornero reform.[1] Its precedent is in fact art. 1 of Law no. 247 of 24 December 2007 (known as the Prodi-Damiano reform), which introduced the principle of calculating coefficients for transforming the contribution amount on the basis of life expectancy, which was subsequently taken over and modified by the Berlusconi Government with the articles. 22-ter, paragraph 2 of Legislative Decree No. 78 of 2009 (the so-called Sacconi rule) and no. 12 of Legislative Decree. No. 78 of 2010, which provided for the automatic adjustment of the retirement age to life expectancy in its final wording which was finally picked up by Article. 24, paragraph 13, of Legislative Decree. No. 201 of 2011 of the Fornero reform.

Thus, when life expectancy began to rise again by five months, after a year-long stop in which life expectancy had declined,[2] and the Italian Ministry of Economy and Finance issued the decree to adjust retirement age accordingly, a scathing barrage was opened up by all political forces, including those who had voted in favor of the Fornero reform, as they immediately declared themselves opposed to raising the retirement age – even more so because the pre-election period was beginning.

According to some, the ban on increasing the retirement age should have been extended to all workers. Others argued that the freeze should have covered only certain categories. According to the President of INPS, Tito Boeri, a generalized freeze would have entailed an increase in expenditure of 141 billion euros.

Therefore, at the end of a wide-ranging debate, the Gentiloni government was unable to do anything other than introducing, on the occasion of Budget Law 2018, an exemption from the increase of the retirement age by five months with reference to workers who fall within 15 professional categories tied to heavy-duty jobs, and in particular truck drivers, leather tanning workers, bricklayers, porters and builders.

Essentially, while other workers from 2019 onwards will retire at 67 years of age, the current retirement age of 66 years and 7 months remains unchanged, with a cost that, according to the Government’s calculations, should lead to an increase in pension expenditure of 100 million euros, which will rise to 122 million if expenses for wage integration funds are also taken into account.[3] This is a significant but limited operation, given that the freeze introduces a benefit of five months which in 2019 will affect 14,600 people, which certainly disregards the revolutionary ambitions of Italy’s political forces, as also lamented during the demonstration promptly called on December 2 by the CGIL union.

This brings us back to the fundamental question. Why, if all political forces agree, has it not been possible to do more? Unfortunately, the answer is a very simple one.

Because Italy cannot afford it, for economic and demographic reasons. Scrapping the Fornero reform would cost between 80 and 90 billion euros, which is too high a sum for a country that already has the third largest public debt in the world at present, and where the number of pensioners increases every day while the active population that pays contributions is drastically reduced.

A topsy-turvy demography: the upside down pyramid

In 1968, when the Brodolini reform was approved, which introduced old-age pensions and the method of earnings-related system calculation for social security benefits, the demographic structure of our country was shaped like a pyramid. The war had recently ended, there were few seniors and many young people. It should be noted that in 1970 each mother had an average of three children (2.70 in 1970, the highest point reached by the fertility rate in our country). Life expectancy was 65 years old, Italians retired at 55 years of age and therefore social security benefits had to be paid, on average, for ten years. This meant that each worker paid at least 30 years of contributions, while only 10 years of social security benefits were paid out by the contributions of the many new generations entering employment. Contributions from three sons could easily finance 10 years of their father’s pension. And for this reason, starting from that reform, our social security system took on the generous structural characteristics that will then undermine its sustainability when demographic changes will occur, that is to say: the earnings-related system, old-age pensions and survivors’ pensions (since fathers were the main breadwinners and mothers took care of their many children, it was imagined that it was right and necessary to create a system which, in the event of father’s death, would basically maintain the same income for the mother as the father’s).

However, as we know, the demographic pyramid has gradually reversed over the years. So much so that today, we have become the oldest country in the world after Japan.

The National Institute of Statistics (ISTAT) tells us that the average age is over 44 years old. About 22.3 per cent of the population is over 65, ie. almost one in four Italians. But there is more, given that our country’s trend towards aging is increasing in a particularly fast way. It is sufficient to think that we are not only the oldest, but also those who are ageing most rapidly in Europe, with increases in the age of the employed, which at certain stages increases by six months or so each year. Again, according to the National Institute of Statistics, the average age of the population will increase from the current 44.7 to over 50 years in 2065, with an increase defined as “certain and intense”. Indeed, according to OSCE data, in 2050 those over 65 will double and in Italy there will be 74 over 65s for every 100 people in their working age (which is calculated to be between 24 and 64 years old), compared to the current 38 for every 100 people.[4]

As the population ages, the birth rates decrease. A trend that unfortunately worsened in 2017 as well, to the point that Italian women have an average of 1.27 children, when in 2010 the figure was still 1.34 and, as mentioned, amounted to 2.70 in 1970.

In less than 40 years, the demographic pyramid has turned upside down and is completely altering the balance that should exist between those who retire and those who have to finance the social security system. Suffice it to consider that if current trends are confirmed, in 2030 one million so-called baby boomers will retire, compared to just over 400 thousand new births.

Faced with such data, countries in similar conditions such as France and economic giants such as China have been drastically changing their economic and social policies, starting with those regarding birth rates, even calling into question the well known single child policy of China. However, our country has remained helpless, and has only approved social security reforms in the wake of this emergency. Nonetheless such reforms have only an impact on social security expenditure and not on the income that’s necessary to finance it.

In fact, our welfare system not only does not support those who have children, but has even more trouble finding a job for the existing ones, who therefore cannot even pay contributions, given that – to date – youth unemployment between 15 and 24 years of age is still at 35.1per cent, after having reached a 40per cent rate last year. Statistics that are even more severe when one considers that every year more than 40 thousand young people flee from our country and go abroad to look for work, thus generating an impoverishment of resources that the General Confederation of Italian Industry (Confindustria) estimates at being around 14 billion euros per year, as it takes into account the costs for their training.[5]

This necessity becomes even more evident when we consider that the income from immigrants’ labour is around 5 billion euros,[6] and while they are not sufficient to compensate for the contributions paid to foreign management by our young people, however they can alleviate our structural failure. It is no coincidence that INPS closed the 2015 financial statements with a negative economic result of 16,297 million euros, despite the 5 billion euros earnings from immigrant workers and the fact that the only profitable assets are those with fewer retired employees, namely that of the self-employed professionals (+3.1 billion euros) and that of the “para-subordinate” workers (+7.1 billion euros).

The comprehensive reform that Italy would benefit from

In order to ensure the maintenance of the social security system and all the more so to finance the abolition of the Fornero reform, which all political forces claim they want, direct state intervention would be necessary, which would mean either increasing debt or increasing taxes. But since the Italian state has now accumulated the third largest public debt in the world, and everyone agrees that the tax burden is unsustainable, parties are reluctant to increase the tax wedge and lack the resources for family support policies. So it is easy to predict that, once the election season has passed, all reformist ambitions in terms of social security that today fill the electoral manifestos and newspaper pages will remain on the table.

It is a real pity because, actually, our country would need a comprehensive reform, to be carried out calmly, away from the financial emergency, aimed at restoring greater equity in a social security system in which, alongside many categories of workers who are defined as “early”, “heavy-duty” and “arduous”, for whom it would be right to reduce the retirement age, there are still tens of thousands of young pensioners who work two jobs and former politicians, at national or regional level, who continue to receive annuities that are out-of-date and completely illogical.

P.S. For the Oxford Dictionary, the word of the year is “youthquake”, understood as the discontinuity brought by young people at a systemic level, a breath of fresh air that should serve precisely to renew countries and societies.

Even in the light of the controversy surrounding the pensions that animated the beginning of the electoral campaign, it is certainly not possible to say that this youth-earthquake has succeeded in stirring the consciences of politicians. If it exists, we hope that it will manage to do so on the voters’ side, because any reform of the pension system, in order to be sustainable, will have to deal with the youth issue…

[1] As a matter of fact, according from data from INPS, between 2012 and 2021, also taking into account the costs for safeguarding the so-called esodati, the workers stuck in limbo who found themselves with no jobs and no pensions, the Fornero reform will payout 80 billion euros worth of savings. The report issued by the social security institution shows that savings are concentrated in the short term, with a negative peak for expenditure in 2019 (slightly above 8.6 per cent of GDP). Over time, expenditure will pick up again, remaining however lower than that forecast in previous reforms (with further savings, exceeding the estimated 80 billion euros in the period 2012-2021) until 2045, when it will cross and then surpass the curves of other reforms in terms of expenditure in relation to GDP (slightly below 10.5 per cent).

[2] In 2015, for the first time since the unification of Italy, life expectancy for men fell by two months, from 80.3 years to 80.1, while for women it fell by three months, from 85 years to 84.7. Life expectancy increased again in 2016.

[3] The technical report states that the exemption for heavy-duty jobs from raising the retirement age “does not structurally alter the medium to long term sustainability of pension expenditure, public finance and debt”. The total costs for the social security system amounted to 94 million euros in 2018, 121.9 million euros in 2019, 276.7 million euros in 2020, 261.6 million euros in 2023 and finally to 300 million euros in 2027.

[4] In the decade between 1993 and 2003, based on data by the National Institute of Statistics, the working population aged for just one year, from an average of 38.2 years old to 39.3 years old. From 2008 to 2015 there has been a constant increase in age, starting from 40.5 years and reaching 43.3 years. In the first three quarters of 2016, the figure was 43.6 years on average. It is also obvious that there has been a slowdown both in the access of young people in employment (-204 thousand between 2008 and 2015) and in the exit from it by older workers (-255 thousand in seven years), mainly due to the effect of the extension of working life. The data also shows that, despite a much higher level of education, the proportion of people in the 15-34 age group in unskilled employment is similar to that in the 55-64 age group, with the result that the proportion of over-educated young people is almost three times as high (37.1 per cent compared to 13.0 in adults).

[5] The National Institute of Statistics data attest to a constant increase in the emigration of young people: it suffices to think that from an estimate of about 60 thousand expatriates in 2010, the number has gone up to over 108 thousand in 2015, half of whom were workers between 20 and 40 years old. As underlined by the “Country Report Italy 2016” of the European Commission, Brussels, 2016, these are young people with university-level education. On the other hand, only 11.5 per cent of foreigners aged between 25 and 64 who reside in Italy can boast a comparable degree.

[6] According to the INPS, each year members from a foreign country paid contributions for about 8 billion euros and receive 3 billion euros worth of pensions and other social benefits, with a net balance of about 5 billion euros.

The author

Michel Martone

Michel Martone is Full Professor of Labor Rights and Industrial Relations. He has acted as Vice Minister of Labor in the Monti Government as well as Visting Fellow at the School of Industrial and Labor Relations at Cornell University in New York


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