The Italian Social Protection System – Flows , Performances and Trends –

1. The Italian Social Protection System– Flows, Performances and Trends – Pietro Tommasino - Banca d’Italia EU-China Social Protection Reform Project October 17th, 2016 – Rome

2. PLAN OF MY TALK • Introduction: main features and trends of the Italian Social Protection System • Pensions: before and after the 2011 Reform • Other issues (if we have time): anti poverty schemes and family policies

3. THE ITALIAN WELFARE STATE: MAIN FEATURES AND TRENDS

4. A (TOO) SIMPLE TYPOLOGY • Social protection systems differ along several dimensions: • Who is covered: universal vs occupational coverage • How benefits are financed: payroll contributions vs general taxation • How benefits are computed: proportional vsflat-rate

5. A (TOO) SIMPLE TYPOLOGY • Social Protection Systems differ along several dimensions: • Who is covered: universal vs occupational coverage. • How benefits are financed: payroll contributions vs general taxation • How benefits are computed: proportional vsflat-rate

6. A (TOO) SIMPLE TYPOLOGY • Social Protection Systems differ along several dimensions: • Who is covered: universal vs occupational coverage. • How benefits are financed: payroll contributions vs general taxation • How benefits are computed: proportional vsflat-rate • Other crucial dimensions are left out: • Means-testing? • Financial viability • Services vs Transfers • What risks are covered?

7. WHERE IS ITALY? • Italy started with a standard Bismark system, but it is (slowly) evolving • Initially, the main drivers for change were financial (un)sustainability and difficult-to-justify occupational privileges • On both issues, important progresses have been made (Health care reform in the seventies, Pension reforms in the nineties,) • Today, there are other reasons for change, due to new social risks and needs (also driven by changes in the family structure): • Too much for pensions – not enough for (almost) anything else • In particular, lack of a single, universal, means-tested anti poverty instrument • Too much transfers – not enough services

8. WHERE IS ITALY?

9. WHERE IS ITALY?

10. WHERE IS ITALY? • There is a wide intellectual consensus about the limits of the Italian welfare system and the possible solutions. • Still, pushing reforms forward is extremely difficult: • Not easy to compensate the losers due to stringent public finance constraints • Within-country differences in economic conditions • Public sector weakness • Inefficiency/ineffectiveness in public service provision (e.g. activation policies) • Difficulties in accurate means testing (also due to tax evasion) • Lack of ex-ante and ex-post program evaluation

11. PENSIONS

12. THE SITUATION BEFORE THE 2011 REFORM

13. SEVERAL STRUCTURAL EXPENDITURE-CUTTING MEASURES • 1992 Less generous rules for the computation of benefits and for the eligibility age • 1995 A new Notional Defined Benefit (NDC) system is introduced • 1997/2007 Other measures, mostly tightening requirements for seniority pensions • 2009-10Retirement age is linked to developments in life expectancy; • eligibility age for old-age pensions for women in the public sector is raised; the interval between eligibility and first benefit is increased • 2011 Eligibility age for old-age pensions for women in the private sector is raised • In the meanwhile, several reforms to strengthen the funded pillar

14. AS A RESULT, A DECLINING PENSION EXPENDITURE Pension Expenditure (% of GDP) Source: RGS (2011), Mid-long term trends for the Pension, Health and Long term care systems

15. THEREFORE, EVEN BEFORE THE 2011 REFORMS… • Expenditure dynamics had been substantially curbed. The 1992 reform cut implicit pension debt by about 1/3 • All in all, even before the major reform legislated at the end of 2011, the Italian pension system was (rightly) considered financially sustainable • Horizontal equity was improved: in the long run, we will have equal treatment between men and women, private and public sector workers • Actuarial fairness (and therefore intergenerational equity) was improved. This is good for the labour market, too: a close link between contributions and benefits implies less distortions and an increased labour supply • The second pillar was (slowly) developing. This is important for the social/political sustainability of the reforms in the public pillar

16. A PROGRESSIVE TIGHTENING OF REQUIREMENTS WAS UNDER-WAY

17. OPEN ISSUES • The transition to the NDC was too slow: only those who started working after 1995 are fully under the new regime. • The set of rules was very complex, not well communicated and not well understood, with an adverse impact on labor market incentives. • Some post-1995 changes were not in line with the NDC-philosophy (e.g. flexibility in the retirement age had been eliminated). • The original NDC also had some (relatively minor) technical flaws (e.g. the response to life expectancy developments was slow, the kind of life tables adopted was backward looking).

18. THE CRISIS AND THE REFORM • In the summer of 2011, strong tensions in the Italian sovereign debt market started. In autumn, the government resigned. The new government quickly approved a fiscal package including an overhaul of the pension system • Why pensions? • Their size relative to the overall budget and to welfare expenditure • While pension experts were aware that the Italian pension system was sound, legislated changes were too back-loaded: an immediate signal (a “pound of flesh”)was required to acquire credibility (cfr. Sweden 2009) • An important lesson for policy-makers: there is a trade-off between a “low profile” approach to reform as the one adopted in the 2009-summer 2011 period (internal opposition is muted) and reforms which hit newspaper headlines (which are noticed by external investors) • The debate on pension reform (and data availability as well) was well-developed and the to-do list was relatively uncontroversial • When time is scarce, transfers are simpler to cut than services

19. THE 2011 REFORM

20. MAIN CHANGES • The rules for benefit computation of the NDC system are extended pro-rata to all workers starting from 2012 • Seniority pensions: The “quota system” is abolished (in 2012, the requirements would have been 35y of contributions & 61 y. of age & contr. + age ≥ 96). The pure contributory requirement for males is increased by 1 year. As a result, in 2012, requirements for a seniority pensions are: 42 years and 1 m. of contributions for men, 41 years and 1 m. for women • Old-Age pensions for women in the private sector: age requirement increases to 62 in 2012 (from 61 in 2011), catching up with males and public sector women in 2018 (instead of 2022)

21. MAIN CHANGES (II) • For those fully under the NDC rules, some flexibility is reintroduced: they can get the old-age treatment up to three years before the “normal” age • From 2013, all pension requirements will change in line with life expectancy (before the reform, the contributory requirement for seniority pensions was excluded). A “safeguard clause” guarantees a minimum level of 67 in 2021 (but according to official estimates this should be reach already in 2019)

22. “MINOR” CHANGES • Lags between the moment at which pension requirements are met and the first benefit payment (“finestre”) are abolished (requirements are increased correspondingly). • For higher pensions: temporary cuts (“contributo di solidarietà”); temporary freeze in price indexation • Gradual increase in contribution rates for self-employed (4 p.p. between 2011 and 2018) • Starting from 2021, requirement increases due to increased longevity and coefficient updating will take place every 2 (instead of 3) years.

23. THE NEW RULES

24. EFFECTS ON EXPENDITURES Source: RGS (2012), Mid-long term trends for the Pension, Health and Long term care systems

25. DID WE GET RID OF THE PRE-REFORM PROBLEMS? • The 2011 pension reform can be seen as the end of a long (and tortuous process), started in 1992. • With respect to the pre-reform scenario, most open issues were addressed: • The long phase-in of the NDC rules (with the ensuing credibility problem) • The excessive complexity • The lack of flexibility • Introducing further elements of flexibility could be considered. The government is currently thinking about this, but focusing on pre-1995 workers • There are several technical instruments to achieve this goal, what is crucial is that the actuarial underpinnings of the system are not jeopardized

26. NEW PRIORITIES

27. A NEW SET OF POLICY (AND RESEARCH) PRIORITIES • While the old problems where mostly solved, some new issues emerged, both from a policy and from a research viewpoint. • In perspective, these are likely to be important for other countries as well: • - Within-cohort differences in longevity developments • - Mortality vs Morbidity • - Old-age employment • - Is the lump of labour (“old in, young out”)really a fallacy? • - Developing reliable and well-functioning funded schemes

28. A NEW SET OF POLICY PRIORITIES (II) • Life expectancy at retirement is affected by socio-economic determinants, such as education, pre-retirement income, occupation; but also race and, of course, gender. Moreover, these differences are widening (Whitehouse and Zaidi, 2008, Munnell et. al 2008) • As transformation coefficients are the same for everyone, this induces a systematic redistribution of lifetime resources among different categories (e.g. for Italy, Mazzaferro et al. 2011). As a side issue, in most countries we lack timely and reliable differential mortality tables • One advantage of NDC system is that this issue is clear, as it all boils down to the transformation coefficients • A related issue is morbidity: do years of life in good health increase with longevity? “Expansion of morbidity” hypothesis vs “Compression of morbidity” hypothesis. In the middle: “dynamic equilibrium” hypothesis. Increasing requirements in line with age may be too much (however, in the long run, health behaviours should adjust) • Furthermore, as with life expectancy, changes in disability-free life expectancy vary with socio-economic status

29. A NEW SET OF POLICY PRIORITIES (III) • Senior workers employment: reducing the gap between the labour costs and the productivity of older workers (OECD, 2006) • Seniority-based wages (even if individually optimal, cfr. Lazear, 1981) should be discouraged • Part-time should be encouraged • In the long run the investment in on-the-job training will increase with stricter pension rules. Policy should focus on the supply side (anti-discrimination laws). Internal organization of firms should also adjust (e.g. mentoring)

30. A NEW SET OF POLICY PRIORITIES (IV) Younger workers employment: is the lump of labour (“old in, young out”) really a fallacy? - The same argument under different garbs (immigrants, women, machines) On average, the evidence appears to be against the argument - Cross-country evidence (Boldrin et al. 1999, OECD, 2006, 2011)

31. A NEW SET OF POLICY PRIORITIES (V) - Time series evidence (Gruber and Wise, 2010) - Of course, results may be biased by omitted variables and reverse causality issues. - A first solution: instrument old-age employment with changes in pension rules (e.g. eligibility requirements). In ongoing work with Roberta Zizza, we use a panel of OECD countries, and a still quite short period of time (7 years) - A second solution: within-country evidence. We use the quarterly micro-panel of the LFS to study the relationship between the probability of a young person to find a job and the average employment rate of senior workers in the area (this avoids the reverse causality issues)

32. A NEW SET OF POLICY PRIORITIES (VI) • The correlation is absent or positive. However, further work is needed • Most importantly: is the argument false also in the short run? In recessions? If coupled with labour market reforms?

33. THE FUNDED PILLAR • The 2011 reform is not necessarily bad for pension adequacy: the postponement of retirement and the full adoption of the NDC computation rules have opposite effects (actually, for women and self-employed adequacy is likely to improve) • However, granting adequate pensions in the future requires further efforts, especially for workers with short/discontinuous careers and low wages. • The main solution is the development of the funded pillar

34. THE FUNDED PILLAR: THREE RELATED POLICY CHALLENGES • In Italy, contributions to occupational and open pension funds are not mandatory. Since 2005, employees can choose whether to invest a fraction of their wages (6,91%) in a severance pay scheme or in a pension fund (the default option). • On impact, the reform increased considerably enrolment rates. This notwithstanding, participation in private pension plans remains relatively low and slow-growing. • - As of end-2015, there were 7,2 million participants (32% of the employed population). Lower figures for women, the young, the self-employed, the South, and smaller enterprises. Assets under management amounted to about 140,2 billions (almost 9% of GDP). Not much in comparative perspective, but not bad either, given also the fully-DC nature of our system. • Moreover, for those enrolled contribution rates are insufficient. • - In 2015, 25% of participants have contributed zero. • Finally, portfolio choices of pension fund participants appear suboptimal. • - Many participants are inertial, i.e. they do not change portfolio as they age. At retirement, they tend to cash-in instead of annuitizing their pension wealth

35. REASONS OF THE CURRENT UNDER-DEVELOPMENT AND VIABLE POLICY OPTIONS Why people (don’t) enrol in pension funds? Source: Guazzarotti and Cappelletti (2010).

36. REASONS OF THE CURRENT UNDER-DEVELOPMENT AND VIABLE POLICY OPTIONS (II) The problems regarding enrolment, contributions, and portfolio choices share common roots: - Binding income constraints. Given the high level of tax and social security contribution, there is not much room left for other retirement savings. Proposed solution: In perspective, cuts in social security contribution rates, with a corresponding increase in private pension contributions could be envisaged - The annuity market. We explored both the supply and the demand side of the market. We used MWR computations to argue that annuity prices are not actuarially fair, due to adverse selection, uninsurable aggregate longevity risk, lack of competition. Proposed solution: better and more timely mortality tables, disseminating information on prices, in the limit (as in Sweden) public provision. - Insufficient financial and pension literacy. According to our estimates, it’s not financial education per se, but ignorance of the rules concerning private pensions to keep workers away from pension funds. Proposed solution: reduce the number of choices, improve default options, disseminate information on both pillars

37. LESSONS FOR OTHER COUNTRIES

38. WHAT HAVE WE LEARNT? • When consolidation becomes urgent, the pension budget cannot be insulated from the rest of the budget. Even well-designed and sound NDC schemes will be subject to parametric tightening, in order to reap short-term savings. Nor NDCs are immune from credibility problems. • Postponing retirement appears to be the most advisable way to proceed, as it sweetens the trade-off between sustainability and adequacy. • To be successful, public pension reforms need policy actions in other fields: labour markets (to help senior workers to keep and retain jobs) and private pensions (to ensure adequacy) • Fairness issues should be carefully considered: less-skilled lower-income workers tend to live less and enjoy less healthy conditions. In the NDC framework these issues can be tackled in the most transparent way

39. ANTI POVERTY POLICIES

40. THE ISSUES • Poverty is more widespread then in other countries. Fraction of people AROPE is 28,3% against 24,5% in the EU. Absolute poverty is at 7% (4 million people). • (Absolute) poverty increased sharply with the crisis: it was at 3% in 2007. • Poverty is quite higher among children (10%)

41. THE PITFALLS OF CURRENT POLICIES • Italy (together with Greece) is the only EA country without a nation-wide means-targeted universal scheme of last resort • The existing schemes are conditional on occupational status or on age (Social pensions) or are provided only by some regions. Furthermore, they are not based on appropriate means-testing measures. • Social services are provided by municipalities, and expenditure (not to talk about effectiveness) is very different across areas (160 euros per capita in the North, 50 euros p. c. in the South) • Lack of coordination among instruments and among public actors

42. THE REFORM UNDER WAY • The parliament is currently discussing an enabling law • The draft law envisages that: • A new nation-wide instrument will be introduced • It will be financed (in part) by abolishing previous piecemeal interventions • It will involve both cash transfers and services in a coordinated way • A relatively new and accurate measure of economic condition (ISEE) will be used to grant/deny access

43. FAMILY POLICIES

44. THE ISSUES

45. THE ISSUES

46. THE ISSUES

47. THE PITFALLS OF CURRENT POLICIES