Slow progress expected

A long-time insider outlines the options available to the new pensions minister to Maria Teresa Cometto

Giuliano Cazzola, 67, (pictured right) says that he is very happy that Maurizio Sacconi has been appointed welfare secretary in the new government of Silvio Berlusconi. "We are very good friends," says Cazzola from his house in Bologna. "We have so many things in common, including our commitment to the Association of Biagi's Friends." Marco Biagi inspired the legislation that introduced some flexibility in the Italian labour market. Because of his ideas he was killed by the Red Brigades in 2002.

"Sacconi oversees a large budget, around €500bn, and it will be interesting to watch him work," he adds.

Cazzola is an economist and an expert on social issues, a long-time (1965 to 1993) leader of the CGIL trade union confederation and a former member of the Italian pension authority (Covip). He was elected to parliament in April's general election on the Berlusconi coalition ticket and is vice-chairman of the House of Representatives' labour committee.

So what are the new government's plans for the pensions system? "Pension funds are not a top priority for Berlusconi nor is a new retirement system," Cazzola says. In fact Berlusconi is not thinking at all of diverting part of the current Italian social security payroll taxes to individual investment accounts, a measure that US President George W Bush proposed in 2005 and that the 2008 Republican president candidate John McCain has pledged to revive if elected to the White House.

The failure of the Bush administration's partial privatisation plan to gain any bipartisan support, and its abandonment, may explain why Berlusconi - according to Cazzola - does not want to make it another major confrontational issue in his dealing with the powerful Italian trade unions and the left-wing political parties.

So Berlusconi is not planning to cut social security benefits, in fact quite the opposite, says Cazzola. "While running his campaign Berlusconi promised to raise benefits for retirees at the lowest end of social security in order to protect their real purchasing power," he says. He adds that their pension cheques are already automatically indexed to inflation, calculated with the consumer prices for workers' and employees' families (FOI) index.

"I know that Sacconi is thinking of elaborating a different inflation index for retirees," Cazzola says. "The new index may be made up of products and services that are more old people-oriented, such as health goods. But I'm not sure it's a good idea, it may only serve to muddy the waters."

Berlusconi is not the only Italian politician paying little attention to the sustainability of public spending for social security. "In the election campaign all the parties ignored that problem, notwithstanding the heavy burden of the latest changes introduced by the [Romano] Prodi administration," says Cazzola. "Prodi's elimination of the previous Berlusconi administration's attempt to raise the retirement age at one go, the so-called Big Step, will cost €7.5bn over the next 10 years, and his granting of bonuses to the so-called wearing jobs - occupations that are particularly stressful - will cost another €2.5bn. But the latter figure may be partially reduced because the administration has still to issue the rules that define which kind of jobs are ‘wearing'." 

 But Cazzola is clearly frustrated by the slow pace of change. "In Italy there is no sense of urgency regarding the pension problems," he says. "Nor there has been a lot of discussion about the results of last year's campaign on the TFR. According to Covip more than 4m workers switched to pension funds, and that should be considered a positive achievement, close to Prodi's goal to convince 35% of eligible pension fund members. But they reduced the number of eligible employees to 12m from the potential membership pool of 20m because they don't include people working in industries where pension funds never took off, even if they were created."

Interestingly enough, according to Cazzola, only 10% of employees were automatically enrolled in pension funds because they stayed silent  -  the legislation having included the principle of ‘silenzio assenso' or ‘silent consent', whereby an individual's TFR would be transferred to a pension fund automatically if he or she did not actively object, in the hope that inertia would increase participation. "A large majority said either yes or no."

Cazzola identifies several persistent problems that explain why Italian pension funds are not yet popular, notwithstanding performances that have beaten TFR yields. "Prodi's campaign failed to be informative and did not reach all employees," he says. "The proof is that the two industries with the best and biggest pension funds, the chemical sector, the Fonchim fund, and the mechanical/automotive sector fund, Cometa, reached a high membership rate, almost the same as in the UK.

"Elsewhere people were confused and didn't trust the campaign. In addition, the Prodi administration's mostly left-wing members were against it. There were many cases of communists distributing pamphlets against pension funds in front of factories, even though their representatives were in Prodi's cabinet."

A notable failure was the pension fund for public school employees, where only 10% of eligible members enrolled, Cazzola says.  Another peculiarity is the very low membership rate among women. "Only 29% of employees who opted in favour of pension funds were women," he notes. "That confirms that pension funds are better understood in strongly unionised, male-dominated industries, such the chemical and mechanical/automotive sectors."

So will Berlusconi launch a new information campaign? "Maybe," says Cazzola. "Each newly hired employee has to decide what to do within six months of starting a job and even people who said they didn't want to switch to pension funds can always change their mind. However, those who embraced the change cannot leave the pension fund system. There have been claims that this rigidity was a major reason why Italians didn't want to leave the TFR."

Indeed, a new book by former premier Giuliano Amato and Mauro Maré, president of pension fund grouping Mefop, proposes that current pension fund members should also be given the possibility to change their mind. And perhaps ironically Umberto Bossi, the leader of the Northern League and a Berlusconi ally, is one of the most vocal supporters of "giving the workers their TFR back".

But Cazzola is not convinced: "I believe that would be too complicated. Besides, people can already get money from their pension funds, up to 75% of their savings, if they need to pay health expenses or to buy a house, and up to 50% for other reasons."

In part, the negative feelings towards pension funds are due to a rule that requires employees to stick with the closed funds managed jointly by their trade unions together with employers' representatives if they with to retain the contribution from their employer.

"In 2005 Berlusconi's then labour secretary Roberto Maroni tried to open up that rule," recalls Cazzola. "But he did not succeed. The idea was, and still is, to let employees choose where to invest their retirement savings among all the open funds as an alternative to the union-sponsored fund. But nowadays Berlusconi does not want to start a fight with the unions on this subject."

Cazzola says that a project he would like to advance in parliament would allow so-called atypical employees, those who work with short-term contacts, to opt out of the social security system for at least a part of their pension. "Six percent out of 26% of the payroll taxes they will have to pay in 2010 could go voluntarily into private pension funds," he says. "That could compensate for the heavier burden they have been carrying since Prodi raised their taxes."

And Cazzola hopes that there will be opportunities for adjustments to create a more balanced retirement system.

"A small step forwards would be the raising of the retirement age of women to the same level as that for men. This would have the additional merit of ensuring that Italy would not be fined by the EU on the grounds of sexual discrimination. Ironically, the best change would be to go back to the original pension reform, promoted in 1995 by then-premier Lamberto Dini, who first linked public benefits to contributions and raised the retirement age."

Since then governments have failed to review the actuarial tables used to calculate the retirement age, Cazzola explains. On the contrary, the Prodi government further prolonged the transition for raising the retirement age. Consequently, the link between contributions and benefits has been weakened Cazzola says.