Matteo Renzi seems to have won a tricky pension battle. But Italy’s prime minister has only skirmished with the real enemy.
Italy has a toxic mix of a generous government-funded pension system, an ageing population and slow GDP growth. The distant future looks all right, thanks to the 2011 Fornero reform, which pushed up the retirement age for most current workers. However, that reform mostly spared existing pensioners, who are a burden on state finances and current workers. The European Commission estimates pension costs at 15.5 percent of Italian GDP in 2020, the second highest in the euro zone after Greece.
In his first 14 months in office, Renzi had stayed away from proposing further reforms. He was pulled in on April 30, when the constitutional court overturned one part of the Fornero package which did have immediate effect. The restoration of original payments for some high earners could have cost the state 18 billion euros.
That number could have disrupted Rome’s relations with Brussels. It would bring the Italian fiscal deficit to 3.6 percent of GDP, too high for Italy to qualify for the fiscal leeway the Commission gives to firm reformers. However, Renzi has come back with a 2.2 billion euro “bonus” to some of the likely claimants.
The move is sure to invite litigation, but the government has shrewdly pitched it as progressive and equitable, and so in keeping with the court’s demand. Besides, the court’s verdict was barely passed so a small settlement may be enough to appease the majority.
As for current costs, Renzi is in danger of moving in the wrong direction. He has suggested allowing more early retirements, to open up jobs for the country’s small army of unemployed young people. That shift could push up the state pension obligations even further.
Universal pension cuts are always unpopular. But high pension expense drains government spending away from more productive areas, like education, while high worker and employer contributions discourage job creation and encourage black-market activity.
Renzi presents himself as a fighter of vested interests and Italy’s gerontocracy. Pension reform is an opportunity to show he means what he says.