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Saturday, July 28, 2007

This is sickening

Italian men stop work and begin living off the state at the average age of 60.7, among the youngest in Europe. In Sweden, by contrast, male workers keep going until 64.3. Italy can ill afford such easy-going retirement. It has one of the European Union's fastest-ageing populations, and its highest levels of both pension spending (about 15% of GDP) and public debt (107% of GDP in 2006).

Twice in the past 12 years, governments in Rome have reluctantly tried to face up to these anomalies. On July 20th Mr Prodi attempted to do so as well. But after months of hard bargaining with the trade unions (the employers' federation was not invited) and with his fractious centre-left coalition, he ended up watering down earlier reforms.

In 1994, Silvio Berlusconi's centre-right government decided to raise the minimum retirement age—from 57 to 60 as of next January, and thereafter gradually to 62 by 2014. Under Mr Prodi's deal, those in jobs defined as “arduous” will enjoy indefinitely the right to retire at 57. These include not only miners and the like, but also shift workers such as bus drivers and factory workers doing repetitive tasks—altogether, an estimated 6% of the workforce.


Italy, along with the rest of Europe, can ill afford its welfare state, and this Italian retirement system is egregiously unsustainable. 62 is not an appropriate age to start retirement in civilization today.

However, there's one detail of the proposed reforms that we should consider:

A greater threat to the finances is the repeated delay in reducing monthly pension payments to take account of longer lives. Back in 1994, it was agreed that state pensions should be revised every decade, but Mr Berlusconi dodged the issue in 2004 and 2005. Last week Mr Prodi put it off to 2010. Thereafter pension levels will be revised every three years, or so the government says. Both the European Commission and the Standard & Poor's ratings agency voiced disappointment at the lacklustre reform.


There would be no problems with Social Security (we couldn't say the same for Medicare) if we had used this system since, say, the 1980's reform. If Social Security had been set up to provide a pension benefit with a particular actuarial present value, not a pension benefit expressed as a monthly benefit, we wouldn't have to worry about increasing longevity. However, this change would be viewed as a benefit cut, and it would make it harder for people to plan their retirement, not knowing until retirement their actual level of Social Security benefits.

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