The generation clash

Article published on Nov. 3, 2003
community published
Article published on Nov. 3, 2003

This article has not been vetted by an editor at Paris HQ

Italian pension reforms could become a model for all European nations - provided that the interests of the next generation are taken into account.

The idea of a ‘Maastricht summit on pensions’ has been put off to a date that has still to be confirmed. The last European Council in Brussels on October 17th only confirmed the will of individual states to act on their own with regard to social protection systems. Nevertheless, the auspices that emerged from the conclusions of that summit about ‘co-ordinating social protection systems between European states’ leave open a window of hope for the future.

‘The baby boom generation in power’

It is now accepted that all the States in the European Union currently find themselves facing the problem of how to finance their social security systems due to a gradual ageing of their populations. It is a problem which will become more relevant when those who were born in the 1960s, the so-called ‘baby boomers’, reach pensionable age. By sustaining their current social security systems, European nations risk putting their own budgets and, on an EU level, the Stability Pact and economic growth, in crisis in the future, as the European Commissioner for Economic Affairs, Pedro Solbes, has declared on numerous occasions. In a Europe which embraces an internal market, economic and monetary union, and an anticipated shared employment strategy, closer co-operation within the parameters of social security systems should not be beyond the realms of possibility.

The reality is, however, that individual States are not prepared to ‘parameterise’ European social security systems. Indeed, each country has a pension system that is derived from deep-rooted traditions on the subject of social security.

Italy’s incentives

The reform of the pension system announced by the Italian government aims to increase the period of time older workers spend in the employment market so as to make savings on expenses in the social security system. Indeed, according to the Italian Minister, Giulio Tremonti, if we continue with the system established after the previous reform of 1995, from 2008 to 2033 expenditure on pensions will no longer be sustainable in the public budget. The planned formula is to raise the retirement age by five years. Therefore, in order to reach pensionable age workers will have to work for 40 years instead of 35. 65 will become the required age to obtain ‘life annuity’ instead of 57 as previously. This rule would only become obligatory from January 1st 2008. In the meantime, the Government hopes to convince workers not to abandon their jobs through an incentive known as ‘contributory exemption’. Anyone who has made contributions for 35 years can benefit from the ‘return’ of those contributions that they would be entitled to at the State’s expense and at the expense of their employer, a gain equal to 32.7% of the gross salary. At first glance, the idea of incentives might be considered effective since it would imply a notable increase in the salary of those workers who would have to postpone their retirement for several years. But it might not be enough. Indeed, if you do a social cost-benefit analysis of the reform, there are a fair amount of elements that invite criticism.

First of all, it is important to remember that any revision of the social system inevitably provokes a mass exodus of workers towards retirement. Indeed, across Europe any revision of the social system aspires to price containment for a not insubstantial period of time which obviously goes against the interests of the workers who are on their way to retirement.

Mind the gap

The Italian Government’s proposal, therefore, clashes with the interests of the new generation. Indeed, it is known that the salaries of the oldest workers are generally higher in comparison with those of younger workers. This is understandable for example when businesses find themselves having to motivate certain fifty-something workers who, because of their age, no longer have aspirations in terms of their careers. In these cases, wages are increased until retirement. But if the required period spent working for the company is suddenly increased by five years, the company itself will have to support enormous losses due to the payment of higher salaries. In other words, it will involve an increase in labour costs for businesses and, as far as it will affect us, when labour costs increase, the demand for work decreases. In other words, it will penalise young people who are ‘impatient’ to enter the world of work.

And that’s not all. The world of work is increasingly flexible or, if you like, precarious. The required 40 years of contributions will probably be an unreachably goal for us. Another questionable element of the reforms concerns the threshold of 2008 as a ‘division between generations’ (see link). The increase in the number of years of contributions from 2008 is not a fair measure and creates division between generations; between those who will be able to choose to retire after making contributions for 35 years or to continue to work, and those who instead will be forced to wait until they have contributed for 40 years. The price of the gap is obviously a political price. It is easy to understand therefore why Mr Berlusconi and his Government have chosen a date so far in the future to begin the reforms; why they have so emphasised the absolute necessity to intervene in the pensions system (so much so as to appear on television as a united team); and why they have so insisted on European involvement. The obvious aim is to avoid a ‘ generation clash’ that will happen in any case in the future. A more gradual reform, that was suggested before, would undoubtedly be fairer and more convenient since every year of postponement carries higher costs for public finances. Maybe the necessary courage is missing.

Thus, this pension reform introduces unclear ideas. It has to be said that it should not all be thrown in the bin. The ‘incentives’ to remain in the world of work are undoubtedly a valuable characteristic that could also be taken into consideration in other European countries which find themselves trying to balance their books with an ageing population and a decreasingly sustainable social security system.

However, social security systems are still ‘in hiding’ from the European Union. The world of work, and consequently the social system that it is tightly linked to, must be harmonised on a European level.