# What will happen to pensions. Facts and analysis

*The crisis does not help the contributors, already affected by the precariousness of work and the demo-economic decline. The deepening of Mirko Bevilacqua and Sandro Gronchi for LaVoce.info *

The contributory pension is the product of a transformation coefficient, increasing with retirement age, for the contributory amount defined as the sum of the contributions paid gross of the interest accrued on the basis of the "sustainable rate" which, every year, is the average nominal GDP growth in the previous five years. The coefficients announced for the two-year period 2021-2022 continue the downward trend which, for two of them, is represented in figure 1. The reductions are attenuated for two reasons: on the one hand, the intensification of updates, that is, the decreasing distance that separates the reference survival tables, on the other a moderate slowdown in longevity. Only temporarily, the trend can be interrupted by the coefficients of the two-year period 2023-2024 which, in the absence of desirable corrections, will refer to the 2020 table destined to record the negative effects of the pandemic on senile survival.

Just as the descent of an escalator can be countered by going up its steps, so can the coefficients be postponed by retirement. However, this will not be enough to preserve pensions if the contribution levels are reduced, as the precariousness of work, which reduces the number and size of contributions, and the demo-economic decline that cuts interest on them, predict. Those of 2021, with a currency of January 1, 2022, will even be negative because they are calculated on the basis of the average nominal GDP growth in the 2016-2020 five-year period which, based on the forecasts for the current year, may go from -0.1 per one hundred (Istat) to ‑0.3 per cent (Bankitalia). To prevent the charge, the "safeguard clause" will intervene (decree law 65/2015 converted into law 109/2015) which provides for its recovery by deduction from subsequent positive interests.

#### INDEXING IN CONTRIBUTIVE LOGIC

This difficult scenario has the risk that the calculation of the coefficients must be reconsidered for a reason involving the indexation of pensions . To explain it, it is necessary to start from the "personal account" which opens with the "deposit" of the first contribution and ends on retirement, when the age-owned coefficient is called to share the balance (contributory amount) in equal years for the pensioner and in others, smaller, intended for the surviving spouse. Where do they all go, waiting to be enjoyed? The Italian system does not have an answer, while that shared by the Northern European contribution systems is that the personal account survives retirement and the annuities remain deposited there until the "withdrawal". In order to guarantee sustainability and equity, the interest on personal accounts does not change after retirement, i.e. pensioners are also recognized the growth (five-year average) of nominal GDP. Since each year accrues more interests than the previous one, remaining on the account for one year more, all this leads to the conclusion that the growth in nominal GDP is precisely the percentage difference between the final values (drawn) of both. In other words, it is the rate at which the pension is to be indexed.

#### FLEXIBILITY AND ERRORS

In truth, the contributory model admits interesting flexibility. Looking over the technical aspects, it will suffice to say that it is allowed to renounce a portion of the indexation in exchange for an increase in the coefficients which implies higher annuities. As if this share were "advanced", or "pre-paid", in this form. The option changes the time profile of the pension, increasing it in the initial phase and reducing it in the final phase. Therefore it reflects the belief that needs decrease with age. The advance of 1.5 per cent, chosen by the Dini government in 1995, was instead aimed at helping the approval of the contribution system by exhibiting its ability to generate replacement rates on average similar to those offered by the remuneration system.

Paradoxically, such an important choice was left entirely in the shade. Without ever being mentioned in the legal text, the advance appeared only at the bottom of the coefficient table with the mysterious name of "discount rate". Thus the message was launched that the contribution system runs out in the formula for calculating the pension, without having its own indexing rule. The mistake was intentional. On the one hand, it worried that, in the long transitional phase, indexation was "dichotomous", that is, that contributory pensions were indexed differently than wages. On the other hand, they did not want to risk the result, badly digested by the unions, that the Amato government had obtained three years earlier by releasing pensions from wages and leaving them indexed to prices only. In reality, the dichotomy could be avoided in the manner of other countries, that is, by extending the indexation of the contributory ones to remuneration pensions. In times when economic growth was still robust, such a choice could easily have met the approval of the unions.

That unparalleled logical leap has never been remedied. Although in a changing form, indexing has always referred to prices and in 2022 the return to the form "by brackets" in force at the time of the Dini reform is expected. The indexation to the nominal GDP discounted by 1.5 per cent (compatible with the method of calculating the coefficients) has never been taken into consideration. There is no reason why price indexing would be equivalent in the hypothesis, denied by the facts, that real GDP could grow to 1.5 per cent.

#### CORRECTION NOT EASY

Correcting the error encounters significant difficulties. First, it must be recognized that a low-growth country, like Italy, cannot afford an advance of 1.5 percent which exposes pensions to the risk of negative indexation. Figure 2 proves this, where, in the 23 years from 2000 to 2022, the indexation to nominal GDP discounted by 1.5 percent is negative twelve times in real terms and eight times in nominal terms. The same figure shows that full indexing is not exempt from risk. Yet, to "conquer" it, you have to pay the price of a more stringent calculation of the coefficients which, for the two-year period 2021-2022, implies the formidable reductions represented, in Figure 3, by the vertical distance between the black and green curves.

One way out is the choice made by Norway to limit the advance to 0.75%. The blue curve in Figure 2 shows that the Norwegian option mitigates, but does not eliminate, the risk of nominally negative indexations which, in a country of "acquired rights" such as Italy, would encounter both legal and political difficulties. Therefore the safeguard clause, created to avoid the reduction of the contribution amounts being formed, should be adapted to avoid also the reduction of the allowances in enjoyment. Sweden is looking at the Norwegian option, worried by the two negative indexations already suffered by its pensions due to an advance similar to the Italian one.

The blue curve in Figure 3 shows the reductions of the 2020-2021 coefficients implied by the advance of 0.75 percent instead of the current 1.5. The red curve shows that the renunciation of reversibility can transform these abatements into mostly positive variations. By respecting the acquired rights, reversibility could give way to a taxed program of assistance to the needy survivor. In chapter 7 of the "Pensions Outlook 2018" ( *Are survivor pensions still needed?* ), The OECD underlines how the growing participation of women in the labor market makes the reasons for an institution bearer of redistributive iniquities at the expense of unmarried people disappear.

*This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/cosa-succedera-alle-pensioni-fatti-e-analisi/ on Sat, 01 Aug 2020 05:15:25 +0000.*