PENSION REFORM: THINK BIG, SETTLE SMALL; GOVERNMENT

UNCLAS ROME 004537

SIPDIS


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

SENSITIVE

E.O. 12958: N/A
TAGS: ELAB ECON PGOV IT ITALIAN POLITICS
SUBJECT: PENSION REFORM: THINK BIG, SETTLE SMALL; GOVERNMENT
FINALIZES MODEST REFORM PACKAGE

REF: a) ROME 2474 b) Rome 1899


1. (SBU) Summary: The Berlusconi government has hammered
out a pension reform package after two years of speculation,
coalition wrangling and increasingly dire warnings over the
system's unsustainability. Prime Minister Berlusconi was
forced to settle for a modest package that falls short of
the ambitious overhaul sought by Finance Minister Tremonti
and a host of economists, businessmen and Eurocrats. Now he
faces a tough fight to overcome organized labor's opposition
and win public acceptance for even this modest proposal.
Italy's potent trade union confederations are gearing up for
an autumn of strikes and agitation to; their ire stems more
from the government's tactical decision to freeze them out
of the bargaining than from the meat of the package. The
furor over pension reform won't topple this Berlusconi
government as it did his first regime in 1994, but it will
ensure a bumpy ride the rest of this year. End Summary.


2. (U) In a highly unusual direct appeal, Prime Minister
Berlusoni addressed the Italian nation September 29 to pitch
the pension reform package approved by the Council of
Ministers earlier that day. His remarks, carried by the
national public TV networks, emphasized the unsustainability
of Italy's current public pension system and his
government's determination to reform it. The reforms would
be just and wise, in that they would be introduced gradually
and would not change requirements for those workers poised
to retire. The prime minister's address capped a months-
long series of often bruising negotiations among the
coalition members over the terms of the reform package.
Negotiated concurrently with the annual budget package, the
pension reform plan will be ammended to a proposal already
passed by the Chamber of Deputies (ref a) that would
redirect severance pay that companies currently hold in
escrow to private pension funds and would reduce employers'
required contributions to the public pension system for
young workers.


3. (U) The pension reform package contains a mix of
immediate and longer-term fixes. In the short term, the
package will:

-- waive payroll taxes for retirement-eligible workers who
decide to stay on the job past their initial retirement
eligibility date, increasing their take-home pay by as much
as 35 percent;

-- increase payroll tax rates for self-employed and
independent workers, to provide some additional short-term
inflow and pare the pension system's near-term operating
deficit;

-- impose a surcharge on a group of wealthy pensioners who,
although entitled to a public pension, don't need one to
maintain a decent standard of living.

The heart of the reform proposal would not be implemented
for an additional five years. Beginning in 2008,
prospective pensioners will face tougher eligibility
requirements for public "seniority" (defined benefit)
pensions. To qualify at that point, pensioners will have
to:

-- have worked, and contributed to the pension system, 40
years (vice the current 35); or

-- be at least 65 years old (men) or 60 years old (women),
vice the current threshold of 57.

According to Tremonti, the tougher qualifying requirements
should generate roughly 12 billion Euro in savings over the
remaining 30 years of the defined-benefit "seniority"
pensions, which will gradually phase out as workers shift to
defined-contribution schemes under the terms of the 1995
Dini reform package.


4. (SBU) Although Tremonti (supported by Central Bank
Governor Fazio, EU Commissioner Solbes and others) had
sought more radical reforms that would have introduced
penalties for early retirement and phased in the tougher
eligibility requirements more quickly, the center-right
coalition's conflicting interests gradually whittled the


package down. The Northern League refused to countenance
early retirement disincentives or rapid phase-in of tougher
eligibility requirements, reflecting one of its core
constituencies, northern workers. National Alliance
resisted attempts to pare the pension benefits enjoyed by
public sector workers, although the public employees' unions
are furious that the incentive program will be limited to
private sector workers. Finally, the Union of Christian
Democrats of the Center resisted cuts to Italy's generous
disability benefit scheme. In the end, the modest package
was the best Berlisconi could realize.


5. (U) Meanwhile, organized labor watched -- and steamed --
from the cheap seats. Accustomed to a collaborative process
in which their views were solicited as prior coalitions
crafted proposals and draft budgets, the major trade union
confederations grew increasingly angry as the center-right
government repeatedly postponed discussions while it haggled
over the details of the package. The unions believe that
structural pension reform isn't really necessary, but to
varying degrees were prepared to support some elements of a
reform package, such as incentives to postpone retirement.
Berlusconi and his coalition partners presented their
finished proposal to the confederation leaders September 29
and said they were prepared to discuss adjustments
consistent with the package's objectives -- but it would
have to be done in three days, in order to maintain the
timetable for presentation to Parliament. Not surprisingly,
the unions rejected these conditions; when Berlusoni elected
to pitch the package on national television, they
immediately announced a four-hour general strike October 24
and warned of additional labor actions and unrest if the
reform package went forward unaltered.


6. (U) Employers' associations joined Tremonti in advocating
a more radical, effective reform package, but they appear
inclined to accept the more modest reform in exchange for
reduction of some payroll taxes and other financial
incentives for companies.


7. (SBU) COMMENT: The Berlusconi government's reform package
is a further step in the right direction, but it will not
generate the budgetary savings and alter the government's
balance sheet enough to cut the deficit, foster economic
growth or promote job creation in the short term. Deferring
the major reform elements until 2008 also defers needed
deficit reduction, and the near-term incentives ironically
may increase pension spending over the next five years.
That said, it's the best package this coalition could
produce. The fight over pension reform exposes the most
basic of the many differences among the coalition members
that impede Berlusconi from pursuing the bolder economic and
political reforms that he promised would make his government
different from its predecessors.


8. (SBU) Berlusconi's more confrontational line with
organized labor is, at this stage, more positioning than
principle. The government's had some past success in
reaching accords with the two more moderate confederations
(CISL and UIL). There are indications that discussions
continue behind the public posturing, with the
confederations seeking a more gradual introduction of the
tougher eligiblity requirements. A government agreement
with the two moderate unions (CISL and UIL) would cement a
majority of public opinion behind the reform proposal. It
would also eliminate another issue around which the three
increasingly fractious trade union confederations might
coalesce. But the price would be further softening of an
already modest package. End Comment.

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2003ROME04537 - Classification: UNCLASSIFIED