Italy’s Populist Revolt Puts Pension Reform at Risk
WHY YOU SHOULD CARE
The fiscal stability of the EU’s third-largest economy is at stake.
By James Politi and Davide Ghiglione
Vito Ausilio remembers what it felt like in late 2011 when the Italian government approved a landmark pension reform to stave off a debt crisis.
The law, named after Elsa Fornero, then labor minister, shifted workers to a defined contribution scheme, stopped indexing pensions above a certain income level for inflation and increased the retirement age to 67. The aim was to raise cash and reassure markets of the commitment to spending discipline in the eurozone’s third-largest economy.
But to Ausilio, 65, a retired sales manager in the petrochemical industry, it meant three more years of work. “I felt like an athlete running a marathon. I could see the finish line, but it would only get farther and I couldn’t reach it. It was extremely frustrating,” he said.
The direct costs [of a repeal] would be high.
Tito Boeri, Italy’s state pension institute
The Fornero law quickly became a punching bag for Italy’s antiestablishment opposition. In this year’s heated Italian general election campaign, scrapping the pensions overhaul was a top pledge for the antiestablishment Five Star Movement and the far-right League. Both parties made big gains in the March 4 vote and are in talks to form a government together. While Luigi Di Maio, the Five Star leader, and Matteo Salvini, who heads the League, disagree on key issues, dismantling the Fornero law is a common goal and could be one of the first measures adopted by a populist government in Rome.
Such a prospect could trigger alarm among EU policymakers and investors in Italian debt.
“The direct costs [to the Italian budget] would be high,” says Tito Boeri, president of Italy’s state pension institute. “But it would be even more costly in terms of the country’s international credibility. That was our ticket to avoid a market collapse and the explosion of our bond spread.”
Mario Monti, the then prime minister, included pension reform in a package of measures called “Save Italy” just a few weeks after taking office in 2011. Internationally, the move was a big hit with key constituencies from the EU to the IMF.
“That reform was not done in normal conditions — we wanted to avoid that there would be no subscribers at the next debt auction,” says Fornero, a professor of economics at the University of Turin. “But it was not only about saving money and cutting spending. The point was for people to understand that their pensions depend on the contributions they pay and not the generosity of politicians.”
But the public backlash was fierce. Not only did people have to delay retirement, but some who had planned to retire early were left without either a job or pension — a category known as Fornero law “refugees.” In the short term, the higher retirement age also discouraged the hiring of younger people as older workers remained on the payroll, although that effect dimmed over time. The indexing freeze also proved contentious and was struck down by the constitutional court.
“The Fornero law was impeccable in terms of budget balance — ours is one of the most sustainable pension systems in Europe now. But internally this created a lot of tension,” says Roberto Pessi, a professor of labor law at Luiss University in Rome.
Indeed, the Fornero law became one of the primary symbols of EU-imposed austerity in Italy. “Simply put, the Monti-Fornero duo caused the double dip in Italian GDP,” says Alberto Bagnai, a newly elected senator with the League and a prominent anti-euro economist. “Their models do not consider the impact of pension cuts on demand.”
Whether the Fornero law is scrapped or modified will depend on the outcome of talks on forming a new government, which began on Wednesday. Some doubt that either Five Star or the League — or the pair together — would go all the way toward fulfilling their pledge.
“My forecast is, they will marginally intervene but they will not eliminate it because it would be crazy and they don’t have the money,” says Riccardo Puglisi, an economist at the University of Pavia. According to Boeri, repealing the Fornero law would cost about €20 billion a year and create a funding gap in the pension system of €85 billion over time.
But in the main square of Testaccio, a neighborhood next to the Tiber in southern Rome, Walter Bei, 47, a taxi driver and League supporter, cannot wait for the end of the pension reform.
“I’m worried because I’ve been working for 25 years — worn out by the crazy traffic and the endless demonstrations — and in the best case I still have 20 to go and I cannot retire because of the Fornero law,” he says. “I hope Salvini gets rid of it.”
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