The debate on retirement flexibility
The Focus (in Italian) assesses the current debate on restoring some flexibility in the pension requirements established with the “Fornero” reform of 2011:
- The Fornero reform sought to ensure the long-term health of the pension system and contribute to fiscal consolidation. The first objective was to increase the employment rate in the 55-64 age bracket, which had previously been one of the lowest in Europe (about 10 percentage points lower than the euro-area average). As a result of the reform, the gap has been halved (5 points) but remains large.
- However, the increase in the employment rate in the 55-64 age bracket was accompanied (partly due to the recession) by a decline in the employment rate in younger age groups (15-24 and 25-49). The same phenomenon had occurred, albeit to a lesser extent, with the two previous pension reforms (the “Maroni” reform of 2004 and the “Prodi” reform of 2007). The scale of these divergent developments appears to be unique to Italy.
- The economic literature confirms the possibility tightening of pension requirements could result in generational crowding-out, the impact of which would be all the greater the broader and more rapid are the changes and the less able the market is to facilitate the gradual exit of older workers. The introduction of flexibility in decisions about when to exit the labour market could help not only to reduce the impact of intergenerational crowding-out on the younger generations but also to sustain labour productivity and ensure a better fit between pension requirements and individual circumstances.
- The recent debate has produced two proposals for introducing greater flexibility, the “Damiano” and the “Boeri” mechanisms, which are currently not a focus of the debate but could offer helpful guidance. Both proposals envisage a further retirement option in addition to the existing channels, in which workers would “exchange” earlier retirement with a reduction in the size of their pension. According to PBO estimates for payroll employees and the self-employed (excluding public-sector employees), if all those who could opt for early retirement actually did so, public spending under the “Damiano” proposal would increase by more than €3 billion in 2017, rising to €8 billion in 2024. The flexibility mechanism under the “Boeri” proposal would have a smaller impact on public spending, with an increase of €650 million in 2017, rising to €2.8 billion in 2024. Both proposals are not neutral from an actuarial point of view.
- In the Government’s proposal for early retirement (APE), the flexibility would be financed with a bank loan that, once the requirements for normal retirement are met, would be repaid through a withholding at source from pensions. This option would involve significantly larger pension reductions than those envisaged under the ”Damiano” system (maximum of 2 per cent per year of early retirement) and the “Boeri” mechanism (3 per cent per year). The Government’s plan also provides for a tax credit for certain categories of pensioners to help them repay the loan.
- In addition to the APE (in the (a) general version and (b) subsidized version), other flexibility mechanisms are under discussion, notably (c) specific measures for workers who started their working lives early, those in physically demanding occupations and those whose contribution history is fragmented among multiple pension schemes, as well as (d) an eighth “safeguard” programme for former workers no longer eligible for a pension following pension reform. Coordinating these four instruments is one of the critical elements of the plan.
Text of document (in Italian)
