Elsa Fornero's presentation at the Annual Canadian Employee Benefits Conference, Montreal, August 2017

1. The opinions expressed in this presentation are those of the speaker. The International Foundation
disclaims responsibility for views expressed and statements made by the program speakers.
“It does not matter how slowly you
go as long as you do not stop.”
Interpreting the Italian
Pension Reform in the Light
of Confucius Wisdom
Elsa M. Fornero
Chair of Economics
University of Turin
Turin, Italy

2. 1. Structural reasons for reforms and differences between parametric
and design changes
2. The need for intertemporal consistency (to limit political
“interference”)
3. Between Scylla and Charybdis: a too slow transition reduces the
reform’s credibility; a too swift one can disrupt people’s life plans
4. Difficulties of persuading citizens that a structural reform is not
meant to just cut expenditure (austerity) but to improve the
tradeoff between sustainability and adequacy
5. The importance of financial education and the need for a “new
paradigm”: Reform, Information and Education

3. Qualifications: Basic Notions of
Pensions and Pension systems
• A pension: not an ordinary financial instrument, but an insurance product
• A public pension system (social security): an institution governed by
the law to help people provide for their retirement and prevent poverty
among older population (compulsory participation and PayGo financing)
• Pervasive risks in both micro/macro dimensions
– Demographic transition increases old age dependency ratios
– Lower growth/higher unemployment rates increase the economic dependency
ratio and reduce the “internal rate of return”
– Politics: tend to favor current generations/groups/categories having higher
electoral weight

4. What Makes a Good
Pension Design?
• A good distribution of risks (in individual life cycle and across
generations)
• A good incentive structure (to increase efficiency; encourage
work in regular forms; reward the continuation of work)
• Fair redistribution
• Solidarity and poverty prevention: subsidize out of job periods,
incentives to older workers, minimum pension/citizen’s basic income
• Transparency, uniformity and low political manipulation

5. Pension Reforms:
Why Are They Needed?
• To recover financial sustainability:
– To remedy the negative impact of both ageing and lower growth
• To reduce distortions and inequality
• To strengthen adequacy of provisions for old age:
– Which mix work/retirement, PayGo/funding and public/private?
– Which indexation (wages or prices) of pension benefits?
– Which mix of monetary benefits/services (i.e., long-term care)

6. Directions for Reforms
Towards an NDC system?
• Strengthen the correlation (at the individual level) between
contributions/ret age and benefit:
• Increase effective exit age:
– Reduce generous early retirement options
– Increase the statutory retirement ages
– Link retirement ages to longevity(?)
• Reinforce older workers’ employment opportunities and monitor groups
more at risk of inadequate accumulation (women?)
• Balance sustainability and adequacy concerns (survivor’s pensions; means-
tested minimum income for all or a “zero pillar” pension granted to seniors)
• Subsidize or make compulsory participation in supplementary private
pensions

7. Why Reforming Pensions
Is so Difficult
• It is a reform that:
– Redistributes across and between cohorts, gender, generations
– Is mainly in the interest of the young, a political minority in an ageing society
– Is permeated by value and ideological judgments
– Has great communication problems: public opinion interprets reforms as
unnecessary “austerity” or retrench of their “acquired rights”
• Technical arguments provides a guide but “the devil is in the detail”
• Important trade offs are involved (“gradual reforms” vs. “cold showers”)
• Coordination with other reforms (i.e., the labor market) is essential
Citizens participation very important and requires FinLit

8. Sustainability
Reform
A
d
e
q
u
a
c
y
An Economic Reading of Pension Reforms:
Improving the Trade off Between Adequacy and Sustainability

9. Do Politicians Prefer to Exploit
Citizens’ Ignorance?
The wedge between the technical and the popular view of pension reforms is
well exemplified by Jean-Claude Juncker’s aphorism
“We all know what to do, but we don’t know how to get re-elected
once we have done it” (The Economist, March 15, 2007)
In a recent work, Anna Loprete and I* try to answer the following questions:
• Is Junker’s proposition empirically justified? Is there a “political toll” to be paid in the
case of pension reforms?
• Is the political cost of reforms reduced when people better understand the reform?
• Is FL a necessary ingredient to reduce the wedge and the consequent political toll?
*“Voting in the aftermath of a pension reform: the role of economic-financial literacy” CeRP WP 171/April 17

10. • Our paper shows that the electoral cost of a pension reform is
significantly lower in countries where the level of economic-financial
literacy is higher
• Data on legislative elections held between 1990 and 2010 in 21
advanced countries (including Canada)
• Robust evidence after controlling for macroeconomic conditions,
demographic factors, and characteristics of the political system
• Findings not robust when less specific indicators of human capital
(general schooling) are used, supporting the view that financial
literacy has distinctive features that help reduce the electoral cost of
reforms with a relevant impact on individuals’ life cycle

11. Italy—November 2011:
Structural Economic and Demographic Problems . . .
To Be Solved in an Emergency
• Paul Krugman: “Now, with Italy falling off a cliff, it’s hard to see how
the euro can survive at all.” The New York Times, November 10,
2011
• TIME (November 7): “[Italy,] the world’s most dangerous economy”
• Süddeutsche Zeitung (October 24): “Italien–schlimmer als
Griechenland” (Italy—worse than Greece)
• The Economist (July 14, 2011): “Italy on the edge: Why the Euro
crisis has just got a lot worse”

12. The Demographic Challenge
Italian population pyramid, 1971, thousands
3000 2000 1000 0 1000 2000 3000
0 _ 4
5 _ 9
10 _ 14
15 _ 19
20 _ 24
25 _ 29
30 _ 34
35 _ 39
40 _ 44
45 _ 49
50 _ 54
55 _ 59
60 _ 64
65 _ 69
70 _ 74
75 _ 79
80 _ 84
85 _ 89
90 _ 94
95 _ 100
100 +
men
women

13. 2011
3000 2000 1000 0 1000 2000 3000
0 _ 5
5 _ 9
10 _ 14
15 _ 19
20 _ 24
25 _ 29
30 _ 34
35 _ 39
40 _ 44
45 _ 49
50 _ 54
55 _ 59
60 _ 64
65 _ 69
70 _ 74
75 _ 79
80 _ 84
85 _ 89
90 _ 94
95 _ 100
100 +
men
women

14. 2061
3000 2000 1000 0 1000 2000 3000
0 _ 5
5 _ 9
10 _ 14
15 _ 19
20 _ 24
25 _ 29
30 _ 34
35 _ 39
40 _ 44
45 _ 49
50 _ 54
55 _ 59
60 _ 64
65 _ 69
70 _ 74
75 _ 79
80 _ 84
85 _ 89
90 _ 94
95 _ 100
100 +
men
women

15. The 2011 “Cold Shower” Reform
• Application, as of Jan 2012 and for future seniorities, of the DC formula to all
workers, with periodic (every two years) updates of annuity rate coefficients
• Increases in the statutory retirement ages (66+longevity, as of 2018) and
phasedown of seniority pensions
• Alignment, as of 2018, of ages and seniority requirements for women in the
private sector to those of men/women in the public sector
• Indexation of eligibility requirements to life expectancy
(three preceding years var)
• Increases in payroll tax rates for farmers and the self-employed
• Temporary freeze of indexation for average-high pensions (>1400 €)
• Solidarity tax on higher pensions (sadly cancelled, later, by the Constitutional Court)
• Free “totalization” of contributions for NDC benefits
• Elimination of “exit windows”, by which workers had to wait 12/18 months to
retire after reaching pensionable age

16. Financial Achievements
But . . . Social Problems
• Significant decrease (wr to the pre-reform scenario) of pension
expenditure/GDP ratio over the next decades
• The swift implementation created a problem with workers who had
left their job in anticipation of a relatively near retirement
• With the DC formula the young, women and older workers more at
risk of inadequate pensions
• Notional contributions (to be paid by the public budget) are devised
for out of work periods workers

17. Financial/Economic Sustainability:
Public Pension Expenditure/GDP
With the Different Reforms
Legend:
• Dark thick continuous line:
current legislation;
• Dark thick dotted line:
legislation ante second 2011
reform ( DL 201/2011)
• Dark thin continuous line:
legislation ante first 2011
reform (DL 98/2011);
• Dark thin dotted line:
legislation ante 2010 reform
(DL 78/2010);
• Grey continuous line:
legislation ante 2004 reform
(L.243/2004)

18. A Reform “Sold” Abroad But Soon
Disowned by Political Parties
• Transitional and communication problems the number of “displaced”
workers (“esodati”)
• The reform also aims at disproving deep-rooted notions, i.e.:
– Workers over 54-55 are lost to the labor market
– The lump of labor fallacy (older workers take away jobs from younger
ones )
• Difficulties with the notion of “acquired rights” (also alimented by
the Constitutional Court)
• Difficulties in making the reform understood and shared

19. Key Takeaways
Which lessons can be drawn from the Italian experience?
• Strong political temptation to electorally exploit the pension system
• Reforms introduced and retreated (a “stop and go” process): curtail
promises in emergency; magnify them when elections loom
• The NDC design introduced in 1995, but with exasperatingly long
phasing in and no public preparation as to the new formula and lack
of public guarantees
• The young, future generations and women (unequally treated in the
labor market) are paying the price, and will in the future
• The reform process has significantly reduced the “pension implicit
debt” but the intergenerational unbalance requires further
intervention
• More transparent information, financial literacy and education
programs needed for sustainability of reforms

20. This presentation is inspired by my recent work on financial literacy and reforms:
• (with A. Lo Prete) “Voting in the aftermath of a pension reform: the role of economic-
financial literacy”; CeRP WP 171/17.
• (with Flavia Coda Moscarola and Steinar Strøm) Absenteeism, childcare and the
effectiveness of pension reforms, IZA Journal of European Labor Studies (2016) 5:1,
DOI 10.1186/s40174-016-0056-3.
• “Reform, Inform, Educate”: A New Paradigm for Pension Systems in B. Marin (ed.),
“The Future of Welfare in a Global Europe”, Ashgate, 2015, pp. 297-324.
• Economic-financial literacy and (sustainable) pension reforms: why the former is a
key ingredient for the latter, Bankers, Markets & Investors, 134, January-February
2015.
• Reforming labor markets: reflections of an economist who (unexpectedly) became
the Italian Minister of Labor, in IZA Journal of European Labor Studies, 2013, 2:20.