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Italy’s Meloni needs urgent fix for ballooning pensions bill

file photo: italian president mattarella meets leaders of the conservative bloc that won the 2022 general election, in rome
Italy's PM Giorgia Meloni

Italy’s new prime minister Giorgia Meloni needs urgently to rein in a bloated pension system that absorbs most social spending and looks increasingly unsustainable in the face of surging inflation.

Rome already has the highest pension bill in the 38-nation Organisation for Economic Cooperation and Development, and says outlays will climb by 58 billion euros ($60.35 billion), or 19.5%, by 2025 as rising prices boost index-linked payouts.

With one of the world’s oldest populations and low birth and employment rates, Italy has too few workers to support a growing army of pensioners, many of whom left work when the system allowed much earlier retirement than it does now.

The grim outlook for state finances is compounded by chronically sluggish economic growth and public debt which stood at 150% of national output at the end of last year, the second-highest in the European Union after Greece.

And pensions remain generous: in 2020 pensioners’ average income was 90% that of employees’, Treasury data shows.

“Italy has to increase the retirement age to reduce the number of pensioners in proportion to the labour force,” said Lorenzo Codogno, head of LC Macro Advisors and former chief economist at Italy’s Treasury.

“We need to free up resources to reduce the tax burden and increase investment in infrastructure, the climate transition and digitalisation to grow the economy.”

ITALY NOT ALONE

While Italy’s dismal demographics and growth make its situation particularly acute, it is far from the only European country where creaking pensions systems are an economic concern and a political hot potato.

French President Emmanuel Macron’s government is trying to push through a deeply unpopular reform that could raise the retirement age from the current 62 to 65.

In Britain, successive prime ministers have guaranteed the “triple lock” system by which state pensions rise every year by whatever is higher – inflation, average earnings or 2.5%.

Italy ranked 32 out of 44 countries surveyed in this year’s Mercer/CFA Institute global pension index. While it performed quite well on the adequacy of current pensions, it came second-bottom in terms of the sustainability of the system.

Against this backdrop, Meloni faces a year-end deadline to present what will be the ninth change to Italy’s pensions since 1992.

If she does nothing, a steep hike in the statutory retirement age to 67 will automatically kick in from January under a return to a system introduced in 2012 at the height of a debt crisis, but suspended seven years later.

At present, under rules put in place for just one year by Meloni’s predecessor Mario Draghi, people are granted a state pension at 64 provided they have worked for 38 years.

Some economists say returning to the 2012 “Fornero law,” named after former labour minister Elsa Fornero, would be best for Italy’s economy and public finances.

Meloni’s rightist coalition has other ideas. Eyeing the votes of millions of elderly Italians, it won the Sept. 25 election promising, among other things, to hike pensions and avoid going back to the Fornero system.

Time is running out, and Economy Minister Giancarlo Giorgetti, the man who must square the circle, is in an awkward spot.

He pledges prudent, debt-cutting fiscal policies even as his party, Matteo Salvini’s League, battles for pensioners’ rights and against any increase in the retirement age.

KICKING THE CAN

Salvini is now pushing to allow people to retire next year after 41 years of work regardless of age.

Codogno said this would be “far too generous”, arguing instead for a flexible system allowing people to retire below Fornero’s statutory age of 67 if they accept corresponding cuts in their pensions.

Draghi, who chose a temporary fix rather than tackling the issue head-on, was also criticised for bailing out the near-bankrupt journalists’ pension fund, known for its generous payouts, by merging it with state pension agency INPS at a cost to taxpayers of a billion euros over 10 years.

With the deadline looming, Meloni may follow Draghi’s lead by opting for a stop-gap solution. One idea mooted in the coalition is to offer a pension next year to people with 41 years of work provided they are 61 or 62 years old – ahead of yet another promised reform in 2023.

A big problem is that Italy’s state pension bill of 16.1% of the gross domestic product in 2021 leaves little money for other things. Rome spends less than the EU average on health, education, innovation and job creation schemes.

Meloni’s plan to cut income support for the unemployed – even as Germany prepares a “citizens’ money” basic income scheme that significantly raises welfare payments – would tilt the budget even more towards the elderly.

Roberto Perotti, economics professor at Milan’s Bocconi University, said Italy needs “a cultural change to gradually wean itself off the idea that the state should provide for the pensions even of the well-off.

“It’s not inevitable to spend all this money on pensions,” he said. “Those who can afford it should take care of their own retirement, leaving the state to take care of the poor.”

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