Patrizia Canziani is currently at the Department of Economics, MIT; she worked on the paper while she was a summer intern at the IMF. Many thanks to Timothy Lane, Alessandro Leipold, Alessandro Momigliano, Alessandro Prati, Nicoletta Emiliani, and Massimo Rostagno for comments; Messrs. D’Angeli and Secondini of INPS and Ms. Caudai of the Ragioneria Generale dello Stato for helpful suggestions, data, and clarifications; and Alison McCaul for valuable research assistance. All remaining errors are the authors’.
Reported in The Economist. August 13, 1994.
Seniority pensions is an institution particular to Italy. They are pensions paid to people who retire before the legal minimum retirement age, but have completed a certain number of years of contribution. They are different from the usual early retirement schemes that exist in many countries (including Italy), because they are not reduced in any way, but are fully equivalent to an old age pension.
Severance benefits in Italy are financed by employers’ contributions equivalent to 7.4 percent of gross wage, which are deposited in an account managed by the employer. These funds are to be disbursed to the worker upon separation. Resources allocated to TFR accounts are large: in 1990, the flow amounted to Lit 24 trillion in the private sector alone. These accounts are a very advantageous form of financing for firms, because they are inexpensive and their use is discretionary (they can even be used in the firm’s own business activities). For this reason, in order to allow a gradual adjustment of firms to the new system, existing balances in the TFR accounts cannot be used for the voluntary pension funds. For a detailed discussion of voluntary pension funds see CER (1993).
Giarda & Morcaldo (1991) offer a brief description of the pension system for government employees.
The pensions of employees of the Italian railways and the Post Office are administered separately.
The main special funds are those for employees In the public transport sector (Fondo di previdenza per il personale addetto ai pubblici servizi di trasporto), in telecommunications (Fondo di previdenza per il personale addetto ai pubblici servizi di telefonia), in the electricity industry (Fondo di previdenza per i dipendenti dell’ENEL e delle aziende elettriche private), and in air transport (Fondo di previdenza per il personale di volo dipendente da aziende di navigazione aerea).
The most important are those for industrial managers (INPDAI--Istituto nazionale di previdenza per i dirigenti di aziende industriali); journalists (INPGI--Istituto nazionale di previdenza dei giomalisti italiani “Giovanni Amendola”); and people working in entertainment (ENPALS--Ente nazionale di previdenza ed assistenza per i lavoratori dello spettacolo).
In 1992, there were about 75,000 of these pensions, accounting for about 0.3 percent of all pensions.
The Chart is based on 1992 data, which show the Treasury as the second biggest pension provider. Today, however, INPDAP, which was created in 1994, has taken over most of the funds previously administered by the Treasury, becoming in effect the second biggest provider in Italy.
Thus, the average accrual rate for government employees is 2.2 percent after 20 years of contributions, declining gradually to 2.03 percent after 35 years. Thus, it is not only higher than that in the nongovernment sector, but it also gives an incentive for early retirement (see also Castellino 1994). Accrual rates for some funds outside INPS are higher.
The period taken into account for the assessed income used to be much shorter before 1992, ranging from the last one month of employment for civil servants to the last five years for dependent workers in the private sector and the last ten years for self-employed. It was then changed to cover the total career for everybody, but this provision had immediate application only for those who had less than 5 years of contributions by December 31, 1992. Transitional arrangements were made for older contributors: the assessed income for those with more than 15 years of contributions by end-1992 was extended from 5 to 10 years, and that for those who had contributed between 5 and 15 years was extended to include the five years ending December 31, 1992, plus all the following years up to retirement.
The retirement age was raised from 60 years for men and 55 years for women to 65 and 60 years, respectively, in 1992. At that time, it was decided to phase in the increase gradually during 1993-2002. The 1995 budget Included a provision accelerating this transition, which is now to be completed by 2000. During the transition, incentives are provided for postponing retirement up to 65 years for men and 60 years for women.
This minimum was 15 years prior to the 1992 reform, when It was raised to 20 years. This increase, however, is being phased in during 1993-2000.
Indeed, according to law 88 of 1989, social security is supposed to be self-financing, and all state transfers to the social security system are supposed to finance only welfare payments. The extent to which this is the case is discussed in detail in section 3.b.
According to this source, Greece paid slightly higher benefits relative to GDP per capita than Italy. This, however, does not take into account the recent revision of Greece’s national accounts that raised GDP (and GDP per capita) by about 20 percent; on the basis of the new national accounts, Greece’s old-age pension benefits relative to GDP per capita would be close to the EU average.
Recent population data and projections were obtained from the World Bank; they may be slightly different than those used in World Bank (1994). For simplicity, the transitional provisions of the 1992 reform in raising the retirement age to 65 years for men and 60 years for women are ignored.
It should be noted that the number of beneficiaries in fact reflects the number of pensions, which is only an approximation of the number of pensioners; if there is a large number of people receiving more than one pension, or receiving a pension and working at the same time (and thus appearing in both the numerator and the denominator), these ratios can be substantially biased.
The Relazione generale sulla situazione economica del paese, 1993, reports that beneficiary ratios for different funds outside INPS range from less than 10 percent (soccer players), to 30 percent (air transportation, entertainment sector, banks), to 40 percent (artisans, priests, INPGI, INPDAI), to more than 100 percent (miners, farmers). Similarly, INPDAI and ENPALS have the highest transfer ratios, while the funds for engineers, lawyers, and notaries have the lowest.
The projections are based on the pension system as at end-1994. They do not incorporate any subsequent changes in the system, notably the acceleration of the transitional arrangements of the 1992 reform approved as part of the 1995 budget (which, however, would only have a marginal impact).
These funds account for the bulk of the pension spending by INPS. Pension spending by other social security agencies outside INPS is currently an additional 4-5 percent of GDP.
Due to data availability, simulations are performed only for the funds of INPS; these account for two-thirds of total pension spending in Italy.
This was one of the proposed measures in the original 1995 draft budget (with effect from 1996), which were eventually withdrawn.
Currently, the expected residual life time after retirement is approximately 12.4 years for men and 21.3 years for women, based on a retirement age of 65 for men and 60 for women (World Bank 1994).
For simplicity, the simulation ignores the possibility that raising the retirement age for women might have an effect on the number of women retiring on a seniority pension.
The original draft 1995 budget included a similar mechanism that would have reduced pension benefits by 3 percent per year.
In the US, the pension earned by an early retiree is calculated so as to be “actuarially equivalent” to that earned by someone retiring at the normal retirement age. In Spain, a penalty of 8 percent per annum is applied for early retirement (with certain restrictions).