Identifier
Created
Classification
Origin
03ROME2474
2003-06-05 07:17:00
UNCLASSIFIED
Embassy Rome
Cable title:  

PENSION REFORM: NERO'S ORCHESTRA PRACTICING FOR

Tags:  ELAB ECON PGOV IT 
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UNCLAS ROME 002474 

SIPDIS


DOL FOR ILAB/BRUMFIELD
DEPARTMENT FOR DRL/IL AND EUR/WE

E.O. 12958: N/A
TAGS: ELAB ECON PGOV IT
SUBJECT: PENSION REFORM: NERO'S ORCHESTRA PRACTICING FOR
UPCOMING PERFORMANCE

REF: ROME 1899

SUMMARY
-------
UNCLAS ROME 002474

SIPDIS


DOL FOR ILAB/BRUMFIELD
DEPARTMENT FOR DRL/IL AND EUR/WE

E.O. 12958: N/A
TAGS: ELAB ECON PGOV IT
SUBJECT: PENSION REFORM: NERO'S ORCHESTRA PRACTICING FOR
UPCOMING PERFORMANCE

REF: ROME 1899

SUMMARY
--------------

1. Like many of its European partners, the Berlusconi
government is struggling to reform Italy's generous pension
system and control anticipated runaway growth in pension
expenditures in the coming years. At this stage, it's not
at all clear the government will succeed. There's
widespread agreement that the current system, if not yet
broken, will break down shortly. But every self-styled
mechanic has a different solution, one that reflects,
naturally, its own priorities. The competing interests,
both across society and within the Berlusconi government's
coalition, have marched steadily toward confrontation. The
unknown variable, at this point, is Berlusconi, who has
espoused a variety of views on both the content and timing
of concluding a reform package wending its way through
parliament. His real position on the issue, one that
truncated his first stint as prime minister, will determine
whether the current reform package comes to fruition or goes
up in smoke. END SUMMARY.

FROM ECONOMIC MILLSTONE...
--------------


2. Italy's pension system suffers from the same structural
problems plaguing those in many other advanced industrial
European economies: an overly generous defined-benefit
scheme that is not sustainable with the country's aging
population. Too few workers are paying for too many
retirees; those pensioners are living longer than ever and,
consequently, taking far more out of the pension system than
they ever put into it. The current system, which allows
many Italians to retire as early as age 57 on as much as 75
percent of their high salary range, sucks up 13.9 percent of
GDP (second only to Austria). Absent substantial reforms
that delay eligibility, reduce benefits or both, the pension
millstone will grow to 16 percent of GDP in 2033. It's no
wonder the subject is enough to send most politicos and
government budget officials running for the hills.


3. In 1995, then-Prime Minister Dini completed the first
substantial reforms to the system, launching a gradual shift
from a defined-benefit to defined-contribution scheme,
raising the retirement age for many to 65 and creating a
"second pillar" in the pension system, private pension

funds. These important structural changes yielded over 28
billion euros in savings from 1996-2000, saving the public
system from insolvency. But the real pain necessary for
long-term sustainability -- reduced pensions (and the
attendant popular outcry) -- was deferred until 2005, when
the formulae/coefficients used to calculate annuities may
first be "reevaluated" (i.e., lowered). Moreover, Italy's
undercapitalized securities markets, dominated by a small
coterie of companies, have generated neither the returns nor
the stability and confidence required to attract workers'
retirement savings. Less than ten percent of eligible
workers have money invested in the 44 collective private
pension funds established through labor-management
negotiations.

...TO ELECTORAL CORNERSTONE
--------------


4. Prime Minister Berlusconi made pension reform a
cornerstone of his 2001 electoral "contract with Italy" to
revitalize the economy, improve government services and, in
general, make Italy more competitive. Two years later, the
government has shown little progress on this piece of the
economic reform puzzle. Despite a substantial parliamentary
majority, reform legislation languished in committee until
late February, when a modest package cleared the lower
Chamber of Deputies. That slow pace reflected both the
explosive nature of the issue and the lack of consensus,
either within the government or between the government,
employers and unions -- over the best package of reform
measures. Italy's three major union confederations agree on
little else these days, but they have forged a common
position on pension reform. Labor ministry officials have
told us that it also reflected a tactical decision to await
help from Brussels, in the form of EU recommendations on
further reducing Italy's public debt and revamping the
pension system, that it could use in developing a consensus.

INTERIM SOLUTION DRAWS MIXED REVIEWS
--------------



5. In the meantime, the government is pursuing a two-pronged
interim solution: energizing private pension funds by
injecting additional capital, and improving incentives for
employees to defer retirement and reducing their pension
contributions. Though many judged the reform proposal that
passed the Chamber in late February surprisingly modest, its
provisions bundled measures to accomplish these objectives
with sweeteners to secure the acceptance of employers, who
are most concerned with excessively high overall labor
costs. The legislation:

-- abolishes mandatory retirement at 65;

-- creates additional incentives for employees to continue
working past 65, primarily by reducing their payroll tax
rate for social security (and thereby raising their take-
home wages) and maintaining provisions of the standard labor
contract as well;

-- provides employers additional incentives to hire new
workers, lowering employers' contribution to public pension
funds for new young workers by up to 5 percent;

-- requires employers to transfer severance pay (which they
currently hold in escrow pending employee's departure) to
private pension funds.

Implied but unspoken in the legislation is the government's
intended second step: an actual reduction of public
pensions, perhaps either via adjustment of the annuity
coefficients during the 2005 review required under the Dini
reform package or pro-rata extension of the defined-
contribution scheme to all workers. Some analysts believe
the Berlusconi government thinks it will be able to weather
public opposition to reduced benefits under the new defined-
benefit scheme if it has succeeded in creating an
alternative private system to provide additional retirement
income to offset the loss of public pension money.


6. Not surprisingly, both employers and unions found plenty
objectionable in the draft legislation. Employers are
unenthused by the prospect of relinquishing management of
the severance pay, which has provided a handy working
capital fund for many companies (since they must set aside
severance for all employees but only pay out a small portion
to those employees who depart in a given year).
Confindustria, the largest employers' association, was
unhappy with the proposal but ultimately accepted it because
it was accompanied by reductions in employers' overall labor
costs. But the organization continues to call for more
radical reform, including use of disincentives (reduced
annuities) to discourage workers from retiring early.

LABOR'S SUPPORT FOR DIFFERENT PLAN
--------------


7. Labor, meanwhile, has a radically different set of
priorities and proposed solutions. The unions agree that
excessively high labor costs are stifling business growth
and, to varying degrees, support long-term structural
changes to the public pension system. But with roughly half
their collective membership drawn from the ranks of retired
workers, the unions strongly oppose any short-term
reductions in pensions -- or any structural changes that
might make future reductions (say, when the annuity
coefficients are reevaluated in 2005) easier. After months
of independent action, the three confederations hammered out
a joint position in March that:

-- opposes a mandatory shift of severance pay; instead,
workers would retain the choice but be encouraged to shift
their severance to the private funds through tax breaks;

-- proposes additional incentives to funnel severance pay
into "closed" pension funds, established on a sectoral or
company basis and managed jointly by employers and unions;

-- opposes reductions in employer contributions to public
pensions;

-- suggests reducing employers' labor costs by reducing
contributions to other social programs, such as maternity
leave, instead of to the pension system.

POSSIBLE JUNE CONFRONTATION
--------------



8. For all of the maneuvering, there is still no clear
impetus, or reason, for early resolution. Berlusconi has
blown hot and cold, spending much of the spring underscoring
the imperative of rapid agreement of the package, then
announcing May 22 that pension reform was a "European
problem" whose repair should await Italy's EU presidency
tenure. The main force for early agreement appears to be
Labor Minister Maroni (one of three ministers from the
idiosyncratic, regionally-focused Northern League),who
spent much of the last month in serial sessions with both
employers and unions. Maroni had sought to reassure labor
and coax some flexibility from it by suggesting that one
possible fix -- disincentives for early retirement, in the
form of reduced annuities -- was off the table. In early
May, though, PM Berlusconi showed one of his cards in
declaring his support for disincentives, comments that were
echoed by Deputy Prime Minister Fini (head of the second
largest coalition partner, National Alliance) and
Confindustria head D'Amato. D'Amato is the other force
driving for early resolution, urging the government to
conclude the reform package before parliament is embroiled
in its annual budget battles.


9. In response, Maroni sought, and secured, Berlusconi's
agreement to a cabinet meeting to reaffirm a unified
government position on the draft legislation -- and
reiterated his position that the final package would not
include disincentives. In the run-up to the cabinet
meeting, the unions are holding firm to their position,
promising coordinated general strikes in late June if the
legislation is not modified to reflect their position.

WHICH LEAVES US...HANGING
--------------


10. Whichever metaphor one prefers, it's not at all clear
how this will play out. Despite near-universal agreement
that the pension system needs fixing, the substantial
differences among the various self-styled mechanics makes a
compromise difficult. Maroni continues to insist that a
workable compromise is achievable, but one wonders if he's
trying to convince himself as much as the wider audience.
How the battle over the reform legislation plays out will go
a long way to determining how much stomach the government
has to tackle the heart of meaningful pension reform --
reduced public annuities-- that looms toward the end of its
expected term in office.
SEMBLER
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2003ROME02474 - Classification: UNCLASSIFIED