The Italian pension system and the 2011 reform. Laura Piatti Ministry of Labour - Technical Advisory Unit

Transcription

1 The Italian pension system and the 2011 reform Laura Piatti Ministry of Labour Technical Advisory Unit 1

2 A brief overview of major changes in the Italian pension system Since 1993 the pension system went through an overall transformation from a dominant singlepillar defined benefit model towards a multipillar defined contribution architecture. This development was based on two main changes: o a reform that introduced a gradual shift of the first mandatory pillar from an earnings related to a notionally defined contribution (NDC) arrangement o measures aimed at the development of funded supplementary pillars through tax incentives, a new regulatory framework and an optional readdressment of a compulsory occupational saving scheme (so called TFR ) into occupational pension plans In order to slow the rise in spending on pension, during the phasingin period of the new system, several other measures have been adopted to tighten eligibility conditions (age and years of contribution) and to harmonize the rules between genders and professions. 2

3 Main contents of past reforms 1993 o new indexation of pension linked to the consumer price index and no more to the dynamic of nominal wages o rise of age requirement for old age pension to 65 years for men and 60 for women o rise of eligibility minimum years of contribution up to 20 years 1995 o adoption of the NDC system in the PAYG first pillar (the new method does not apply to workers with at least 18 years of contribution. For workers with fewer years of contribution the pension is calculated ( pro rata ) with a mixed system. For those starting to work since 1996 the new system is fully applied. o inclusion of a minimum age requirement (57 years) for the so called seniority pension (pension benefit with 35 years of contributions) 3

4 Main contents of past reforms o alignment of pension rules of workers of public sector with those of private sector; temporary freezing of indexation to prices for higher pension 2004 o 2007 more restrictive requisites to retire in mixed and fully NDC system, with the aim of increasing the effective age of retirement and consequently the replacement rates o 2010 o revision of the procedure for updating the so called transformation coefficients through a simplified procedure which falls entirely within administrative competences Rise of age requirements for women working in Public Administration 4

5 The 2011 reform package: key principles Enhance the medium and longterm sustainability of the pension system. Provide fairness across and intra generations. Promote greater flexibility and improve the incentive structure to remain at work even after the statutory retirement age. Link retirement age and contributory periods to changes in life expectancy. Improve transparency, merging entities providing pensions (INDAP and ENPALS into INPS). 5

6 The 2011 reform package: key changes The key changes introduced in December 2011 have mostly aimed at: raising the pensionable age by tightening eligibility conditions through: increased age for old age pension an automatic link between age of retirement and increases in life expectancy abolition de facto of the so called seniority pension (35 years of contribution) harmonizing rules between: genders (equalization of retirement ages) professional categories (retirement ages and convergence of the method of calculating pensions) generations (generally applied pro rata NDC method from January 1, 2012) 6

7 Pension reform details (1) Extension of the contributionbased system to all workers as of Increase from 60 to 62 (63 and 6 months for selfemployed) in the statutory retirement age for women working in the private sector, as of Further increases in the following years to reach the age of 66 as of Increase from 65 to 66 in statutory retirement age for all other workers, as of Socalled windows mechanism eliminated. At least 20 years of contribution and pension benefits equal to at least 1,5 times the social pension needed to retire. 7

8 Pension reform details (2) A safeguard clause to guarantee that the statutory retirement age increases for all up to 67 as of 2021 (in case this threshold is not reached through the automatic mechanism linking retirement age to increases in life expectancy). Transformation coefficients calculated up to 70 years and linked to developments in life expectancy. This determines an increase in pension benefits and an incentive to retire later than the statutory age. 8

9 Pension reform details (3) As of 2012, increase in the required contribution for early retirement pensions from 40 to 42y and 1m for men and 41y and 1m for women and then by 2014 to 42y and 3m for men and 41y and 3m for women. Early retirement allowed only through this channel (the previous system is abolished). For people retiring before 62, the benefits related to contributions accrued before 2012 will be reduced by 2pp per year up to the age of 62. Possibility to retire early at 63 with at least 20 years of contributions and a pension benefit equal to at least 2.8 times the social pension (workers who started working after 1996). 9

10 Pension reform details (4) As of 2013, all pension requirements (regardless of age) will also change in line with developments in life expectancy. After 2019, adjustments for the effects of life expectancy will be carried out every 2 years (instead of every 3 years). Creation of a board of experts to study new forms of gradual access to pensions, decontribution and complementary pillars these are the major measures in order to deal with the transition (reduce the impact of the immediate changes) and the adequacy of the per capita pension wealth 10

11 Tightening of eligibility conditions for old age pensions Before austerity packages After Law 122/10 After Law 214/11 Standard age for old age pension * Projected standard age for old age pension ** Minimum standard age for old age pension *** Projected standard age for old age pension Year of retirement Males public sector y 3m 66y 7m 67 69y 9m Males private sector y 3m 66y 7m 67 69y 9m Females public sector (2012) 66 66y 3m 66y 7m 67 69y 9m Females private sector y 3m 66y 7m 67 69y 9m Social allowance **** m 66y 7m 67 69y 9m * First automatic adjustment to change in life expectancy: 3 months ** The actual pensionable age will depend on the automatic link to life expectancy *** Actual pensionable age can be higher than 67, in accordance with changes in life expectancy **** Minimum age for access to the main solidarity scheme 11

12 2011 pension reform: major structural savings 8.5bn total cumulative savings in 2014, increasing to 22bn in In , indexation freeze for pension benefits higher than twice the minimum provision ( 4.9bn savings in 2014). Overall revision of the pension system, including early retirement schemes ( 3.2bn in 2014, up to 16bn in 2020). Higher social contribution rates for farmers and selfemployed ( 0.6bn in 2014 increasing to 1.6bn in 2020). Solidarity contributions for some schemes and funds. 12

13 17,0 Effects of the recent regulatory interventions on the financial sustainability of the pension system (Public pensions expenditure as a percentage of GDP) 16,5 16,0 15,5 15,0 14,5 14,0 13,5 13,0 12,5 In the long run the adoption of the NDC system stabilizes the pension expenditure to GDP. The financial effects of the most recent interventions in the social security field are visible especially in the period 2013 to , Legislation before Law 122/2010 Legislation before Law 214/2011 Current legislation 13